1. Suppose there are n risky assets with normally distributed payoffs , and no risk-free asset....
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1. Suppose there are n risky assets with normally distributed payoffs , and no risk-free asset. Assume all investors have CARA utility and no labor income. Define a to be the aggregate absolute risk aversion defined by 1 α = Σi_₁ (1/a₂)* Let 7 = (₁,...,n) denote the vector of supplies of the n risky assets. Let denote the mean and Σ the covariance matrix of the vector X = (₁,...,n)' of asset payoffs. Assume Σ is nonsingular. There is no consumption at date 0. Show that the vector p = γ(μ - «Σ7) is an equilibrium price vector for any > 0. Hint: Solve each investor's portfolio choice problem subject to the budget constraint p'0 = Who. Next show that the markets clear, using the budget constaints to eliminate the Lagrangian multipliers. 1. Suppose there are n risky assets with normally distributed payoffs , and no risk-free asset. Assume all investors have CARA utility and no labor income. Define a to be the aggregate absolute risk aversion defined by 1 α = Σi_₁ (1/a₂)* Let 7 = (₁,...,n) denote the vector of supplies of the n risky assets. Let denote the mean and Σ the covariance matrix of the vector X = (₁,...,n)' of asset payoffs. Assume Σ is nonsingular. There is no consumption at date 0. Show that the vector p = γ(μ - «Σ7) is an equilibrium price vector for any > 0. Hint: Solve each investor's portfolio choice problem subject to the budget constraint p'0 = Who. Next show that the markets clear, using the budget constaints to eliminate the Lagrangian multipliers.
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a Selection of risky Asset should be made on the bases of Coefficient of Variation CM ie H... View the full answer
Related Book For
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba
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