Consider a single consumption good and two states of nature {a, b}. An investor has preferences...
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Consider a single consumption good and two states of nature {a, b}. An investor has preferences and a (random) endowment of this commodity as follows: ● u (x(a), x(b)) = logx(a) + logx(b), (e(a), e(b)) = (0, 2) In order to hedge against risk this investor can trade two securities with returns trading at a price q₁ = 3 per ·(¹), denominated in units of the commodity: r₁ = unit and r2 = (2), trading at a price 92 Find the optimal consumption plan of this investor and answer: If instead of asset markets this investor faced contingent markets, for what (rela- tive) contingent market prices would this investor choose THE SAME optimal p(b) consumption plan? = = 4 per unit. Answer: Consider a single consumption good and two states of nature {a, b}. An investor has preferences and a (random) endowment of this commodity as follows: ● u (x(a), x(b)) = logx(a) + logx(b), (e(a), e(b)) = (0, 2) In order to hedge against risk this investor can trade two securities with returns trading at a price q₁ = 3 per ·(¹), denominated in units of the commodity: r₁ = unit and r2 = (2), trading at a price 92 Find the optimal consumption plan of this investor and answer: If instead of asset markets this investor faced contingent markets, for what (rela- tive) contingent market prices would this investor choose THE SAME optimal p(b) consumption plan? = = 4 per unit. Answer:
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ANSWER To find the optimal consumption plan of the investor we can use the expected utility maximiza... View the full answer
Related Book For
Quantitative Methods for Business
ISBN: 978-1285866314
13th edition
Authors: David R. Anderson, Dennis J. Sweeney, Thomas A. Williams, Jeffrey D. Camm, James J. Cochran
Posted Date:
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