Consider an investor with initial wealth of WO = 10000. He/she has the opportunity to invest...
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Consider an investor with initial wealth of WO = 10000. He/she has the opportunity to invest in a risk-free account yielding 4% p.a. or in a stock index account with an expected rate of return of 10% p.a. and respective standard deviation of 25% p.a. The expected utility function, defined over final wealth is given by E[U(W1)] = E[(W1)-(a/2) Var(W1). The risk aversion parameter has value a = 0.00025. a) State the decision problem in terms of expected wealth and the variance of the expected wealth as a function of the portfolio weights (w for the risk-free asset and (1-w) for the risky asset). b) Depict the decision problem in a μ- o-diagram. Consider an investor with initial wealth of WO = 10000. He/she has the opportunity to invest in a risk-free account yielding 4% p.a. or in a stock index account with an expected rate of return of 10% p.a. and respective standard deviation of 25% p.a. The expected utility function, defined over final wealth is given by E[U(W1)] = E[(W1)-(a/2) Var(W1). The risk aversion parameter has value a = 0.00025. a) State the decision problem in terms of expected wealth and the variance of the expected wealth as a function of the portfolio weights (w for the risk-free asset and (1-w) for the risky asset). b) Depict the decision problem in a μ- o-diagram.
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Managerial economics applications strategy and tactics
ISBN: 978-1439079232
12th Edition
Authors: James r. mcguigan, R. Charles Moyer, frederick h. deb harris
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