2. Justin has $1 million dollars. He comes to you for advice on how to invest...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
2. Justin has $1 million dollars. He comes to you for advice on how to invest the money. You do some research and find that there are three ways he can invest. He can invest in stocks, bonds or hold cash. Let the proportion of wealth he invests in stocks be x while the proportion of wealth he invests in bonds be y. You research the potential returns from investment and decide there are 5 different scenarios that could occur. In each of these scenarios, the return to cash is zero. In scenario 1, the value of stocks and bonds remain unchanged. This occurs with probability 0.4 In scenario 2, the value of stocks double and bonds increase in value by 50%. This occurs with probability 0.2 In scenario 3, stocks lose half their value and bonds decrease by 25%. This occurs with probability 0.2 In scenario 4, stocks double but bonds decrease by 25%. This occurs with probability 0.1 In scenario 5, stocks lose half their value but bonds increase by 50%. a. (5 points) Calculate what Justin's final wealth is in each of the five scenarios, as a function of x and y. Let W1, W2, W3, W4 and Wg indicate his wealth in each of the respective scenarios. b. (10 points) Suppose that Justin's utility is given by U(W) = W –w². (The unit for W is millions of dollars). What values of x and y will maximize Justin's expected 1 4 utility? Present your final answer in fractions rather than decimals. 2. Justin has $1 million dollars. He comes to you for advice on how to invest the money. You do some research and find that there are three ways he can invest. He can invest in stocks, bonds or hold cash. Let the proportion of wealth he invests in stocks be x while the proportion of wealth he invests in bonds be y. You research the potential returns from investment and decide there are 5 different scenarios that could occur. In each of these scenarios, the return to cash is zero. In scenario 1, the value of stocks and bonds remain unchanged. This occurs with probability 0.4 In scenario 2, the value of stocks double and bonds increase in value by 50%. This occurs with probability 0.2 In scenario 3, stocks lose half their value and bonds decrease by 25%. This occurs with probability 0.2 In scenario 4, stocks double but bonds decrease by 25%. This occurs with probability 0.1 In scenario 5, stocks lose half their value but bonds increase by 50%. a. (5 points) Calculate what Justin's final wealth is in each of the five scenarios, as a function of x and y. Let W1, W2, W3, W4 and Wg indicate his wealth in each of the respective scenarios. b. (10 points) Suppose that Justin's utility is given by U(W) = W –w². (The unit for W is millions of dollars). What values of x and y will maximize Justin's expected 1 4 utility? Present your final answer in fractions rather than decimals.
Expert Answer:
Answer rating: 100% (QA)
Am xproportion of inventmemt in stocks 7 proportion of in vestment imbond 2... View the full answer
Related Book For
Posted Date:
Students also viewed these economics questions
-
In the endogenous growth model, suppose that there are three possible uses of time. Let u denote the fraction of time spent working, s the fraction of time spent neither working nor accumulating...
-
For the preceding problem you should find that there are significant differences among the three treatments. The primary reason for the significance is that the mean for treatment III is...
-
For the preceding problem you should find that there are significant differences among the three treatments. One reason for the significance is that the sample variances are relatively small. To...
-
Write structures for the following bicyclic alkanes: (a) Bicyclo [1.1.0] butane (b) Bicyclo [2.1.0] pentane (c) 2-Chlorobicyclo [3.2.0] heptane (d) 7-Methylbicyclo [2.2.1] heptane
-
An increase in the rate of consumer savings is frequently tied to a lack of confidence in the economy and is said to be an indicator of a recessional tendency in the economy. A random sampling of n =...
-
Describe Alex and Ani' s sales process before and after the mobile application was deployed.
-
1. Describe "intangible" assets. 2. Is it possible for working capital to be negative? Retained earnings? Why? 3. The liquidity of assets is important to creditors. Does the liquidity of assets...
-
If you put $ 500 in the bank today and leave it for 10 years, will you have more money if the bank pays you 4.25 percent per annum in simple interest or 3.65 percent per year and compounds the...
-
You want to be a millionaire when you retire in 40 years. You can earn A 12.5 percent annual return. How much more will you have to save each month if you wait 10 years to start saving versus if you...
-
Three entrepreneurs were looking to start a new brewpub near Sacramento, California, called Roseville Brewing Company (RBC). Brewpubs provide two products to customersfood from the restaurant segment...
-
A blanking operation is to be performed on 2 mm thick cold rolled steel. The part is circular with diameter = 75 mm. Determine: a) the appropriate punch and die sizes for this operation if the...
-
Describe the four major categories or sources of product or service differentiation.
-
Harley Davidson gets hired by customers for social and emotional reasons (jobs) that go well beyond the functional characteristics of the motorcycle and its ability to provide transportation or...
-
Discuss how to build the resources and capabilities to differentiate.
-
Identify the eight ways in which a company may create value through diversification, and the advantages of each source. Be able to evaluate a diversified companys ability to create value using one or...
-
Distinguish among the core concepts of strengths, weaknesses, resources, capabilities, and priorities.
-
QUESTIONS A teacher and two research assistants at Istanbul Esenyurt University want to do a research project on the cleanliness of the lake and the diversity of fish in Bykekmece lake. In this...
-
D Which of the following is considered part of the Controlling activity of managerial accounting? O Choosing to purchase raw materials from one supplier versus another O Choosing the allocation base...
-
Suppose that the central bank is in a repeated relationship with the private sector. If the inflation rate is i = i* and output is Y = YT, then suppose the reward each period to the central bank is...
-
In the coordination failure model, suppose that consumers preferences shift so that they want to consume less leisure and more consumption goods. Determine the effects on aggregate variables in the...
-
In the Malthusian model, suppose that there is a technological advance that reduces death rates. Using diagrams determine the effects of this in the long-run steady state and explain your results.
-
Understanding the Feds actions that are needed to stabilize the interest rate The diagram below shows three different money demand curves and a target interest rate i*. Fill in the table below using...
-
This section looks at US recessions over the past 60 years. To work out this problem, first obtain quarterly data on US output growth for the period 1960 to the most recent data from www.bea.gov....
-
This question asks you to examine the movements of investment and consumption before, during and after the recession of 2001. It also asks you to consider the response of investment and consumption...
Study smarter with the SolutionInn App