Question: Suppose that the agent has initial wealth A = 1 to invest in two financial assets. one riskless and one risky. The price of the

Suppose that the agent has initial wealth A = 1 to invest in two financial assets. one riskless and one risky. The price of the riskless asset is 1 and its return is 2. and short-selling on this asset is allowed. The priee of the risky asset is 1 and its return is r with probability distribution: 3" = 1 with probability P1 r = 2 with probability P? = 3 with probability P3 Shortselling the risky asset is not allowed. If the agent invests o in the risky asset and 1 o in the riskless asset. find the support of the probability distribution at = (iname) of the agent's portfolio return rp. If the agent maximises a von Neumann Morgestern utility function u(W) over final wealth W. show that the optimal choice of o is positive if and only if the expectation of r is greater than 2. [Hintz find the first derivative of u(.) and calculate its value when o. = [1.]

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