5. Suppose that the returns on the Canadian bond and stock markets are normally distributed (with...

Transcribed Image Text:

5. Suppose that the returns on the Canadian bond and stock markets are normally distributed (with parameters as in Problem 1), that I have exponential utility and that my current wealth is $1000. (a) Sketch the objective function for utility maximization in the case a = 0.01. What is the utility-maximizing allocation? (b) Sketch the objective function for utility maximization in the case a = 0.001. What is the utility-maximizing allocation? (c) Compare your answers from (a) and (b). (d) Show that the maximum of µ(w) – 500ao²(w) occurs at ŵ = 0.8909 – 0.0016 0 (e) For what values of a is the utility-maximizing allocation 100% equities? (f) Evaluate lima→∞ , where w is given in (d). Does your answer make intuitive sense? (g) Sketch the utility-maximizing allocation to bonds, as a function of a. How does the utility-maximizing allocation compare to the variance-minimizing allocation? 5. Suppose that the returns on the Canadian bond and stock markets are normally distributed (with parameters as in Problem 1), that I have exponential utility and that my current wealth is $1000. (a) Sketch the objective function for utility maximization in the case a = 0.01. What is the utility-maximizing allocation? (b) Sketch the objective function for utility maximization in the case a = 0.001. What is the utility-maximizing allocation? (c) Compare your answers from (a) and (b). (d) Show that the maximum of µ(w) – 500ao²(w) occurs at ŵ = 0.8909 – 0.0016 0 (e) For what values of a is the utility-maximizing allocation 100% equities? (f) Evaluate lima→∞ , where w is given in (d). Does your answer make intuitive sense? (g) Sketch the utility-maximizing allocation to bonds, as a function of a. How does the utility-maximizing allocation compare to the variance-minimizing allocation?

Answer rating: 100% (QA)

lets dive into this analysis with a hypothetical company and its competitor in the same industry For simplicity lets call our main company Company A and its competitor Company B Well assess their prof... View the full answer