2. Alice believes that her car would cost £12500 to replace if it was stolen or damaged. Based on crime statistics for the area she lives in, she believes that the probability of her car being stolen or damaged is 0.15. (i) Alice's utility function is given by U(w) = ln(w) for w> 0 and she as £35000 in the bank. Calculate how much Alice would be prepared to pay (in a single payment) to insure her car against theft or damage (ii) Repeat the calculation in the previous part but now assume Alice has £500000 in the bank.
2. Alice believes that her car would cost £12500 to replace if it was stolen or damaged. Based on crime statistics for the area she lives in, she believes that the probability of her car being stolen or damaged is 0.15. (i) Alice's utility function is given by U(w) = ln(w) for w> 0 and she as £35000 in the bank. Calculate how much Alice would be prepared to pay (in a single payment) to insure her car against theft or damage (ii) Repeat the calculation in the previous part but now assume Alice has £500000 in the bank.
MATLAB: An Introduction with Applications
6th Edition
ISBN:9781119256830
Author:Amos Gilat
Publisher:Amos Gilat
Chapter1: Starting With Matlab
Section: Chapter Questions
Problem 1P
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Transcribed Image Text:2. Alice believes that her car would cost £12500 to replace if it was stolen or damaged.
Based on crime statistics for the area she lives in, she believes that the probability of
her car being stolen or damaged is 0.15.
(i) Alice's utility function is given by U(w) = ln(w) for w > 0 and she as £35000 in the
bank. Calculate how much Alice would be prepared to pay (in a single payment)
to insure her car against theft or damage
(ii) Repeat the calculation in the previous part but now assume Alice has £500000 in
the bank.
Transcribed Image Text:4. Assume that a risk-free money market account is added to the market described in Q2.
The continuously compounded rate of return on the money market account is 0% per
period.
(i) Use the method of Lagrange multipliers to determine the proportions of wealth
invested in the three assets available for the minimum variance portfolio with
expected return μ. Your answer must express the proportions as a function of µ.
(ii) Recall that the market portfolio has highest Sharpe ratio. Formulate the optimi-
sation problem which characterises the market portfolio. You don't have to solve
this optimisation problem.
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