Question: Problem 3 - Investor Heterogeneity Assume there are two types of agents: 1 4 identical arbitrageurs with rational EZ = Zandt = T andVN identical

Problem 3 - Investor Heterogeneity Assume there are two types of agents: 1 4 identical arbitrageurs with rational EZ = Zandt = T andVN identical noise traders with biased ENZ = Z + 8 andt = TN. a) Solve for the equilibrium price in this economy. b) On the same graph, plot the equilibrium price against o for the following cases: a. Equal relative risk bearing capacity: VATA = VNTN; VNTN b. Marginal investor is an arbitrageur: -0; VATA+ VNON VATA c. Marginal investor is a noise trader: - 0 . VATA + VNIN c) Under what parameters are prices efficient? Optimistic? Pessimistic

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