The indifference utility function is given as U(E(r), o) = E(r) - 0.5Ao, where A is...
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The indifference utility function is given as U(E(r), o) = E(r) - 0.5Ao, where A is a risk aversion coefficient (i) How do we determine the optimal portfolio consisting of two stocks that maximizes the utility? (ii) Two risky stocks with the following characteristics exist: Stock 1 2 Expected return Standard deviation E(ri) 0.20 0.15 (0) 0.45 0.32 Correlation coefficient P1,2 = 0.20 What are the optimal weights of these stocks (for the optimal portfolio) for an investor with A = 4 that maximize this investor's utility? What about another investor with A = 2 ? The indifference utility function is given as U(E(r), o) = E(r) - 0.5Ao, where A is a risk aversion coefficient (i) How do we determine the optimal portfolio consisting of two stocks that maximizes the utility? (ii) Two risky stocks with the following characteristics exist: Stock 1 2 Expected return Standard deviation E(ri) 0.20 0.15 (0) 0.45 0.32 Correlation coefficient P1,2 = 0.20 What are the optimal weights of these stocks (for the optimal portfolio) for an investor with A = 4 that maximize this investor's utility? What about another investor with A = 2 ? The indifference utility function is given as U(E(r), o) = E(r) - 0.5Ao, where A is a risk aversion coefficient (i) How do we determine the optimal portfolio consisting of two stocks that maximizes the utility? (ii) Two risky stocks with the following characteristics exist: Stock 1 2 Expected return Standard deviation E(ri) 0.20 0.15 (0) 0.45 0.32 Correlation coefficient P1,2 = 0.20 What are the optimal weights of these stocks (for the optimal portfolio) for an investor with A = 4 that maximize this investor's utility? What about another investor with A = 2 ?
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To determine the optimal portfolio consisting of two stocks that maximize the utility for an investor we need to find the weights w1 and w2 of each st... View the full answer
Related Book For
Microeconomics
ISBN: 9781464146978
1st Edition
Authors: Austan Goolsbee, Steven Levitt, Chad Syverson
Posted Date:
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