Consider the following portfolio choice problem. The investor has initial wealth w and utility u(x) =...
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Consider the following portfolio choice problem. The investor has initial wealth w and utility u(x) = x/n. There is a safe asset (such as a US government bond) that has net real return of zero. There is also a risky asset with a random net return that has only two possible returns, R₁ with probability 1- q and Ro with probability q. We assume R₁ <0, Ro > 0. Let A be the amount invested in the risky asset, so that w - A is invested in the safe asset. 2. Find A as a function of w. 3. Does the investor put more or less of his portfolio into the risky asset as his wealth increases? 4. Now find the share of wealth, a, invested in the risky asset. How does a change with wealth? 5. Calculate relative risk aversion for this investor. How does relative risk aversion depend on wealth? Consider the following portfolio choice problem. The investor has initial wealth w and utility u(x) = x/n. There is a safe asset (such as a US government bond) that has net real return of zero. There is also a risky asset with a random net return that has only two possible returns, R₁ with probability 1- q and Ro with probability q. We assume R₁ <0, Ro > 0. Let A be the amount invested in the risky asset, so that w - A is invested in the safe asset. 2. Find A as a function of w. 3. Does the investor put more or less of his portfolio into the risky asset as his wealth increases? 4. Now find the share of wealth, a, invested in the risky asset. How does a change with wealth? 5. Calculate relative risk aversion for this investor. How does relative risk aversion depend on wealth?
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2 To find A as a function of w we need to maximize the investors utility function subject to the bud... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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