An investor wants to maximize the expected value of his utility of wealth over two years....
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An investor wants to maximize the expected value of his utility of wealth over two years. The utility function is logarithmic. His initial wealth is Xo = $1000. At time 0 he buys A(0) stocks. At time 1 (year) he rebalances his portfolio and holds A(1,w) stocks where w is the outcome of a Bernoulli toss. Calculate A(1, H), A(1, T) and A(0) using the Cox and Huang methodology. The risk neutral (actual) probability of obtaining H is p = (p=1). The risk-free interest rate is zero. Take So= 100. Formally, the model is Xt+1 = max E[In(X₂)] A At St+1+Xt- At St An investor wants to maximize the expected value of his utility of wealth over two years. The utility function is logarithmic. His initial wealth is Xo = $1000. At time 0 he buys A(0) stocks. At time 1 (year) he rebalances his portfolio and holds A(1,w) stocks where w is the outcome of a Bernoulli toss. Calculate A(1, H), A(1, T) and A(0) using the Cox and Huang methodology. The risk neutral (actual) probability of obtaining H is p = (p=1). The risk-free interest rate is zero. Take So= 100. Formally, the model is Xt+1 = max E[In(X₂)] A At St+1+Xt- At St
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