3. A time 0, an investor invests $1 in an asset with gross return R, where...
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3. A time 0, an investor invests $1 in an asset with gross return R₁, where R₁ is distributed lognormally with parameters ₁ and 0₁. At time 1, she reinvests the proceeds of her initial investment in an asset with gross return R₂, where ₂ is distributed lognormally with parameters, and 0₂. At time 2, she consumes her final wealth. (a) What is meant by the investor's certainty-equivalent wealth in this con- text? (b) Assuming that the investor has constant relative risk aversion p > 0, what is her certainty-equivalent wealth? (c) What is the expected rate of return on her portfolio? Hint: a random variable Y is said to be distributed lognormally with parameters and o iff Y exp(X), where X is distributed normally with mean and standard deviation o. 3. A time 0, an investor invests $1 in an asset with gross return R₁, where R₁ is distributed lognormally with parameters ₁ and 0₁. At time 1, she reinvests the proceeds of her initial investment in an asset with gross return R₂, where ₂ is distributed lognormally with parameters, and 0₂. At time 2, she consumes her final wealth. (a) What is meant by the investor's certainty-equivalent wealth in this con- text? (b) Assuming that the investor has constant relative risk aversion p > 0, what is her certainty-equivalent wealth? (c) What is the expected rate of return on her portfolio? Hint: a random variable Y is said to be distributed lognormally with parameters and o iff Y exp(X), where X is distributed normally with mean and standard deviation o.
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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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