Question: Question: There are two possible states Normal and Disaster, and two tradable assets: a risky portfolio-market, and a risk-free bond. Per dollar of investment, the

Question: There are two possible states Normal and Disaster, and two

Question: There are two possible states Normal and Disaster, and two tradable assets: a risky portfolio-market, and a risk-free bond. Per dollar of investment, the market portfolio returns 1+rNm and 1+rDm in states N and D, respectively, and the risk-free asset pays the same rate 1+rf in either state. Assume MRSD,N=(cNi/cDi)D/N for an individual i with consumption levels of cNi and cDi in either states. Solve for the optimal demand for two assets as a function of rNm,rDm,rf and the initial wealth W

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