Question: Question 2 (a) Explain why the utility function of a risk-averse agent is concave. [5 marks] (b) Consider three identical bonds A, B and C.

Question 2 (a) Explain why the utility function of a risk-averse

Question 2 (a) Explain why the utility function of a risk-averse agent is concave. [5 marks] (b) Consider three identical bonds A, B and C. Each bond makes a profit of 10% with a probability of 90% and a loss of 70% with a probability of 10% independently of the others. Let X be an investment of 30,000 in bond A and Y a portfolio investment of 10,000 in each of the three bonds A, B and C. Let Lx and Ly be the loss function of investment X and Y respectively. Find the VaR of Lx and Ly at a level of 95% and comment on your result. [10 marks] (c) Calculate VaRf(L) and CVaRf(L) where L has a Cumulative Distribution Function (CDF) F1(x) = 1 e-for 0

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

please can i get the answer for these finance questions ANSWER ANY TWO (2) QUESTIONS Question 1 - [30 marks] Part I Mr.Red and Mr.Blue each own homes located on a flood-prone area of Port louis....

Show alll the steps Problem 3. (Technology) Suppose a producer has access to the technology given by the Cobb-Douglass production function y = 3K1 14. a) What can you say about the returns to scale...

2 a) Given utility function U (C; R) = min (C; 2R); daily endowment of time 24h, price and wage pc= w = 1; nd optimal choice of C; relaxation time R and labor supply L. (three numbers, use secrets of...

Macroeconomics assignment.? 3. Consider a two-period world with uncertainty. Utility for the representative agent is given by U = " (CI) + Bu(C2) 8 0 Agents believe that they can save and dissave...

Let r and s be solutions to the quadratic equation x 2 b x + c = 0. For n N, define d0 = 0 d1 = r s dn = b dn1 c dn2 (n 2) Prove that dn = r n s n for all n N. [4 marks] (b) Recall that a commutative...

I need answers in details 5. Consider an infinitely lived individual born in time zero, endowed with a cake of size xo. The cake is storable (without depreciation) and infinitely divisible. The agent...

Economics questions... . Suppose that a market is composed of two firms that simultaneously choose quantities. Firm 1 has 22 a cost function C1(q1) = q1^2. Firm 2 has a cost function C2(q2) =...

Self-EvaluationProblems 2-1. Suppose there are only two goods that Bob cares about(1) material welfare and (2) leisure time that he "buys" from the outside world at $40 per unit and $20 per hour,re-...

Predictive text entry systems are familiar on touch screens and mobile phones. This question asks you to consider how the same principles might be used in a programming editor for creating Java code....

Find an equation of the line containing the given point and perpendicular to the given line. Given the point (1, -1) and the line 2x + 3y = 4:

A telescope is constructed from two lenses with focal lengths of 95.0 cm and 15.0 cm, the 95.o.cm lens being used as the objective. Both the object being viewed and the final image are at infinity....

Which firm has a higher debt capacity? Multiple choice question. A profitable firm An unprofitable firm

Novak Company reports the following for the month of June. Date Explanation Units Unit Cost Total Cost Dune 1 Inventory 270 $6 $1,620 12 Purchase 630 7 4,410 23 Purchase 900 8 7,200 30 Inventory 336...