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21.2. Assignment 2 Both Senior and Junior has a wealth today of 1 each. The investment universe comprise of a risky and a risk-free asset which both have a price of 1. The risky can go up to 1.3 or down to 0.9 with an equal probability, whereas the risk-free has a zero return. Senior and Junior both have CRRA- preferences with risk-aversion equal to unity for all the states (today, as well as for the two future states) without any discounting. II. (a) Find the optimal allocation (proportion) between risky and risk-free assets, and what is the expected consumption for all states. (b) Will Senior and Junior choose different allocations? (c) Junior is then restricted from short-selling any of the securities, but will not change her present consumption. How should she allocate her savings? (a) Is she better or worse off, due to the short-selling constraint, and if so, express any difference in terms of consumption equivalence. 173 21.2. Assignment 2 Both Senior and Junior has a wealth today of 1 each. The investment universe comprise of a risky and a risk-free asset which both have a price of 1. The risky can go up to 1.3 or down to 0.9 with an equal probability, whereas the risk-free has a zero return. Senior and Junior both have CRRA- preferences with risk-aversion equal to unity for all the states (today, as well as for the two future states) without any discounting. II. (a) Find the optimal allocation (proportion) between risky and risk-free assets, and what is the expected consumption for all states. (b) Will Senior and Junior choose different allocations? (c) Junior is then restricted from short-selling any of the securities, but will not change her present consumption. How should she allocate her savings? (a) Is she better or worse off, due to the short-selling constraint, and if so, express any difference in terms of consumption equivalence. 173