The risk-free return on a government bond is 0.02. A risky asset is available with a...
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The risk-free return on a government bond is 0.02. A risky asset is available with a return of 0.10 and a standard deviation of 0.04. a) Assume you are optimally willing to accept a standard deviation of 0.02. What is the rate of return you can achieve with your portfolio? Why? Indicate the point in your graph. b) Plot the situation in a) for a well-behaved utility function. c) What percentage of your wealth do you invest in the risky asset in a)? d) Redo a) and c) if you are willing to accept a standard deviation of 0.03. e) What is the price of risk in a)? f) Assume your utility function is u(R,,,) = min (25R,,3-750,). Determine the optimal portfolio composed of the two assets mentioned before. What is b? Show in your graph. g) Assume you cannot borrow money to invest in the stock market. Your utility function is u(R,,o,)=R, -2.50,. Determine the optimal portfolio composed of the two assets mentioned before. Show in your graph. h) Assume you cannot borrow money to invest in the stock market. Your utility function is u(R,,o,)=R, -1.50,. Determine the optimal portfolio composed of the two assets mentioned before. Show in your graph. i) [Extra Credit] Does your answer change in f), g), and/or h), if you can borrow up to 3 times your wealth to invest in the stock market? If yes, why and how? If no, why not? j) Could your optimal choice in a) be described by the utility function u(R₂,0₂) = R(x-₂). If yes, determine the appropriate value of x. If no, why not? The risk-free return on a government bond is 0.02. A risky asset is available with a return of 0.10 and a standard deviation of 0.04. a) Assume you are optimally willing to accept a standard deviation of 0.02. What is the rate of return you can achieve with your portfolio? Why? Indicate the point in your graph. b) Plot the situation in a) for a well-behaved utility function. c) What percentage of your wealth do you invest in the risky asset in a)? d) Redo a) and c) if you are willing to accept a standard deviation of 0.03. e) What is the price of risk in a)? f) Assume your utility function is u(R,,,) = min (25R,,3-750,). Determine the optimal portfolio composed of the two assets mentioned before. What is b? Show in your graph. g) Assume you cannot borrow money to invest in the stock market. Your utility function is u(R,,o,)=R, -2.50,. Determine the optimal portfolio composed of the two assets mentioned before. Show in your graph. h) Assume you cannot borrow money to invest in the stock market. Your utility function is u(R,,o,)=R, -1.50,. Determine the optimal portfolio composed of the two assets mentioned before. Show in your graph. i) [Extra Credit] Does your answer change in f), g), and/or h), if you can borrow up to 3 times your wealth to invest in the stock market? If yes, why and how? If no, why not? j) Could your optimal choice in a) be described by the utility function u(R₂,0₂) = R(x-₂). If yes, determine the appropriate value of x. If no, why not?
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Related Book For
Bank Management and Financial Services
ISBN: 978-0078034671
9th edition
Authors: Peter Rose, Sylvia Hudgins
Posted Date:
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