An individual has utility function U-bln(C) where b is a parameter, C is consumption. The individual...

 

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An individual has utility function U-bln(C) where b is a parameter, C is consumption. The individual is choosing consumption over two periods and her subjective discount factor (0) is 0.9. Her consumption this period is 10 and for next period E(1/C+1) is 1/11 and the covariance of 1/C+1 with the asset pay-off is -0.5/b. She can buy an asset today at price P with an expected pay-off next period (E(X+1)) of 11. (a) What is the price of the asset in terms of b if she is maximising utility? (7 marks) (b) Suppose that b varies with the growth of consumption. Examine what are the implication of this for the risk premium on the asset (6 marks) (c) Discuss the results of b chanaina with arowth rates of consumption in the context of time-varving expected returns on risky assets (12 marks) An individual has utility function U-bln(C) where b is a parameter, C is consumption. The individual is choosing consumption over two periods and her subjective discount factor (0) is 0.9. Her consumption this period is 10 and for next period E(1/C+1) is 1/11 and the covariance of 1/C+1 with the asset pay-off is -0.5/b. She can buy an asset today at price P with an expected pay-off next period (E(X+1)) of 11. (a) What is the price of the asset in terms of b if she is maximising utility? (7 marks) (b) Suppose that b varies with the growth of consumption. Examine what are the implication of this for the risk premium on the asset (6 marks) (c) Discuss the results of b chanaina with arowth rates of consumption in the context of time-varving expected returns on risky assets (12 marks)

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a The price of the asset is given by P EX118 P 11109 P 1222 b If b varies with the growth of con... View the full answer