Suppose an investor is faced with two investment opportunities, A and B. There are two possible...
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Suppose an investor is faced with two investment opportunities, A and B. There are two possible states of nature, 51 and 52. Depending on the state of nature, the investment opportunities generate the following monetary amounts (incomes): If state s; occurs, investment A generates 400 while investment B generates 25. If state s occurs, investment A generates 200 while investment B generates 650. Let the probability of state sy be represented by a (so the probability of state są is (1-1).) Assume the investor is risk averse with elementary utility function v(c) = ln[c]. iii) Assuming 7 = 1, suppose there is a bundled investment (e.g., a mutual fund) that has fraction 0.3 of investment A and the remainder (fraction 0.7) in investment B. Would the investor prefer this mutual fund over investing exclusively in either A or B? iv) Maintaining the assumptions of the mutual fund composition in part (iii) - i.e.. the mutual fund has fraction 0.3 of investment A and the remainder (fraction 0.7) in investment B. For what range of probability for state si would the investor prefer the mutual fund to the choice of having to invest entirely in one of A or B. Illustrate on a graph in income state contingent space. Suppose an investor is faced with two investment opportunities, A and B. There are two possible states of nature, 51 and 52. Depending on the state of nature, the investment opportunities generate the following monetary amounts (incomes): If state s; occurs, investment A generates 400 while investment B generates 25. If state s occurs, investment A generates 200 while investment B generates 650. Let the probability of state sy be represented by a (so the probability of state są is (1-1).) Assume the investor is risk averse with elementary utility function v(c) = ln[c]. iii) Assuming 7 = 1, suppose there is a bundled investment (e.g., a mutual fund) that has fraction 0.3 of investment A and the remainder (fraction 0.7) in investment B. Would the investor prefer this mutual fund over investing exclusively in either A or B? iv) Maintaining the assumptions of the mutual fund composition in part (iii) - i.e.. the mutual fund has fraction 0.3 of investment A and the remainder (fraction 0.7) in investment B. For what range of probability for state si would the investor prefer the mutual fund to the choice of having to invest entirely in one of A or B. Illustrate on a graph in income state contingent space.
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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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