(a) Calculate the risk-premium on this portfolio and provide a brief interpretation of it(b) Calculate the minimum sale price of the capital assets for the average investor. Suppose that the average investor in a hedge fund exhibits mild risk aversion with a utility function for wealth (x) of the formU) - 3x4/5The average investor has an amount X invested in the fund, where 70% of X is invested in risky capital assets and the remaining 30% isinvested in "risk-free" money-market assets. Assume that due to a recent crisis within the capital markets there is now a 35% chance that thevalue of the risky capital assets held by the average investor will decrease by 40% during the next few months.

The compensation an investor expects to receive for keeping a portfolio of riskier assets in…

Answered: (a) Calculate the risk-premium on this…

(a) Calculate the risk-premium on this portfolio and provide a brief interpretation of it (b) Calculate the minimum sale price of the capital assets for the average investor.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

(a) Calculate the risk-premium on this portfolio and provide a brief interpretation of it

(b) Calculate the minimum sale price of the capital assets for the average investor.

Suppose that the average investor in a hedge fund exhibits mild risk aversion with a utility function for wealth (x) of the form
U) - 3x4/5
The average investor has an amount X invested in the fund, where 70% of X is invested in risky capital assets and the remaining 30% is
invested in "risk-free" money-market assets. Assume that due to a recent crisis within the capital markets there is now a 35% chance that the
value of the risky capital assets held by the average investor will decrease by 40% during the next few months.

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