2. Consider the CCAPM. Let r be the interest rate at which an investor borrows. Assume...
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2. Consider the CCAPM. Let r be the interest rate at which an investor borrows. Assume the investor chooses (co, 01,...,0K) such that K Co + 1 T, AOk = y 1+ k=1 where y is initial wealth. (10) a. Suppose there are only two states at time one and two assets. Use the usual discounted two period expected utility of the CCAPM but suppose instantaneous utility is u(c) = where a > 0 is a parameter. Using the first order conditions for optimization find an equation for the optimal 0 in terms of the optimal 02. (10) b. Now consider the CCAPM with a general utility function u. Ex- plain the effect on the risk premium for an arbitrary asset k if the subjective discount rate B rises. Recall u'(c) is marginal utility of consumption. It satisfies u'(c) > 0 for all c and if e rises u'(c) falls. 2. Consider the CCAPM. Let r be the interest rate at which an investor borrows. Assume the investor chooses (co, 01,...,0K) such that K Co + 1 T, AOk = y 1+ k=1 where y is initial wealth. (10) a. Suppose there are only two states at time one and two assets. Use the usual discounted two period expected utility of the CCAPM but suppose instantaneous utility is u(c) = where a > 0 is a parameter. Using the first order conditions for optimization find an equation for the optimal 0 in terms of the optimal 02. (10) b. Now consider the CCAPM with a general utility function u. Ex- plain the effect on the risk premium for an arbitrary asset k if the subjective discount rate B rises. Recall u'(c) is marginal utility of consumption. It satisfies u'(c) > 0 for all c and if e rises u'(c) falls.
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Introduction to Corporate Finance
ISBN: 978-0324657937
2nd edition
Authors: Scott B. Smart, William L Megginson
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