31. The following diagram shows what might happen to an investment of $80 in a risky...

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31. The following diagram shows what might happen to an investment of $80 in a risky portfolio over two time periods. In addition, there exists a risk-free bond yielding 10% per time period. The last column displays the desired terminal wealth, i.e. that of an insured portfolio. Using dynamic asset allocation compute the initial strategy that should be undertaken (i.e. the mix of portfolio and risk- free bonds) that will guarantee a terminal wealth of at least $80. Time 0 Time 1 Time 2 D $320 A $80 B $160 C $40 E $80 F $80 G $20 $80 Insured portfolio $320 $80 $80 31. The following diagram shows what might happen to an investment of $80 in a risky portfolio over two time periods. In addition, there exists a risk-free bond yielding 10% per time period. The last column displays the desired terminal wealth, i.e. that of an insured portfolio. Using dynamic asset allocation compute the initial strategy that should be undertaken (i.e. the mix of portfolio and risk- free bonds) that will guarantee a terminal wealth of at least $80. Time 0 Time 1 Time 2 D $320 A $80 B $160 C $40 E $80 F $80 G $20 $80 Insured portfolio $320 $80 $80

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To guarantee a terminal wealth of at least 80 we need to determine the initial strategy that balances the investment in the risky portfolio and the ri... View the full answer