You are a financial analyst studying the behavior of investors in the stock market. You find that investors tend to exhibit a recency bias, which means they give more weight to recent events when making investment decisions. You want to test the impact of this bias on the decision-making of an investor who has a risk aversion coefficient of 3.

Suppose the daily returns of a stock are normally distributed with a mean of 0.1% and a standard deviation of 1%. The investor is considering whether to invest in this stock for a period of 10 days.

a) Calculate the expected return and standard deviation of the stock over the 10-day period.

b) Assuming the investor does not exhibit the recency bias, calculate the certainty equivalent of the investment.

c) Assuming the investor exhibits the recency bias and only considers the returns from the most recent 5 days, calculate the certainty equivalent of the investment.

d) Calculate the risk premium required for the investor to invest in the stock for the full 10-day period given their risk aversion coefficient.

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