5% or 5 in portfolio theory?

[Still_On_Diet]

for expected returns and variances..for example if E[r]=5% then in your calculation do you use 0.05 or 5 . I normally use 0.05 but any idea if this is acceptable in the exam?

[Kenny]

It depends on the equation. Some of the equations require using whole numbers (i.e. 5 instead of .05) for them to work appropriately. Off the top of my head I don't remember which ones (y* and w_d for optimal risky portfolio?) so I tend to err on the side of using 5.

[Tim><]

I have found that rather than memorizing which to use, you could just as easily make an assumption and then do a smell check to see whether your assumption was correct.

[Roto]

Originally Posted by Still_On_Diet

for expected returns and variances..for example if E[r]=5% then in your calculation do you use 0.05 or 5 . I normally use 0.05 but any idea if this is acceptable in the exam?

The inconsistency noted above... along with the explicit assumption of a standard utility function with fixed parameters which applies to all economic agents are two of the most silly things that I've come across in all my years of studying economic/finance....

[Car'a'carn]

The equation for utility function:

U=E[r]-.005Asigma^2

requires integers instead of decimals, y* and w_d are derived from this one and also require integers. These are the only ones.

[Kenny]

Originally Posted by Car'a'carn

The equation for utility function:

U=E[r]-.005Asigma^2

requires integers instead of decimals, y* and w_d are derived from this one and also require integers. These are the only ones.

Amazing, I actually remembered something

[asdfasdf]

from what I've seen if you always use integers, then just express your final answer as a percent where appropriate your ok,

eg don't say the return on the optimal portfolio is 7, say 7%,

and for the record I find representing percents as whole numbers moronic, .07 <> 7!

[mas2003]

I think using percents is asinine too. I don't do it. If you use percents, the standard utility equation is U=r-.005*A*sigma^2. If you use decimals, the equation is U=r-.5*A*sigma^2 (because you divide by 100 to go from percents to decimals and you're squaring sigma in the formula, you have adjust the constant by a factor of 100).

I think the book is aimed at learning disabled B-School kids and the authors felt like decimals would confuse them too much.