Answer to Question #196138 in Economics of Enterprise for binyam

Question

5. Suppose that you are a portfolio manager for a large, diversified mutual fund. The fund’s chief economist is forecasting a slowdown in aggregate economic activity (i.e., a recession). Discuss how would you use your knowledge of estimated income elasticities of demand to alter the composition of the portfolio? 

Answer 1

As the portfolio manager, I would value the percent change in quantity demanded for mutual fund divided by the percent change in income. This measure will help predict the impact of general financial investments and mutual fund as this will be useful in forecasting demand for mutual fund over a period of time. Thus, it will helps in estimating the required production level of financial investments at a certain point of time in the future. This will provide measures to prevent the business from entering recession.