Please explain qu1 and the concept behind the CARA function (a) What characterizes a CARA utility function? Give an example of such a utilityfunction and show why it is displays CARA.(b) It can be shown that an investor with a CARA utility function who faces normallydistributed risk has preferences represented by:aE [u(w)] = E [w] - Var [w]2where w is wealth and a is a risk-aversion parameter. Suppose the investorsoriginal wealth is given by wo and that there is a risky asset with rate of returndistribution r~ N(µ, σ²). There is also a risk-free asset with a rate of return rf.The investor seeks to allocate x to the risky asset and wo x to the risk-free one.What is the expected wealth and its variance resulting from this allocation?(c) Find the optimal allocation x* and discuss how it depends on the model parame-ters.

The utility function measures the consumer's satisfaction as a consumption function of real goods,…

Answered: (a) What characterizes a CARA utility…

(a) What characterizes a CARA utility function? Give an example of such a utility function and show why it is displays CARA.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Q: The Euro Exchange Rate Defies Forecasts The euro (the currency of 17 of the 27 member countries of…

A: The given data on the graph and the information is analyzed in the solution.Forecasts regarding…

Q: The equation S = I + NCO describes the savings market for an entire national economy engaged in…

A: Savings in an economy often utilized to either invest in domestic financial products or invest in…

Q: 6. Derive the functional form of the IS curve for the following economy: [Hint: Use the equilib-…

A: Given; C=C0+C1(Y-T)G=G¯I=I0-I1(r)T=T¯

Q: Express the states (|0) + |1))//z and (|0) – |1))/VI in a basis in which they are not the same up to…

A: In this question we have to find out the relative phase shift with the help of the above…

Q: Show the change, if any, from SRAS to SRAS1 with an arrow indicating direction of change and explain…

A: Economists and policymakers generally use a graphical depiction of the market condition because it…

Q: always arise from measuring price levels with a fixed basket of goods and what steps can be taken to…

A: A consumer price index is a cost record, the cost of a weighted average market basket of shopper…

Q: Suppose research shows that drinking sodas increases the risk of heart disease. As a result, the…

A: Demand Curve: - demand curve is the graphical way of showing the relationship between the quantity…

Q: Which of the following data would be analyzed to determine whether any shift in the MPI has occurred…

A: The MPI is a metric that evaluates initiated utilization, the idea that the expansion in private…

Q: Suppose the central bank announces that it will increase the money supply in the future, but it does…

A: When the central bank announces to increase the money supply in the coming future but does not raise…

Q: Consider the following numerical example of the IS-LM model: C= 100 + 0.3Yd ; I = 150 + 0.2Y – 1000…

A: IS-LM model is widely used to denote the simultaneous equilibrium in product and money markets.…

Q: In April 2012, the Bazanian Daily, a leading newspaper in the country of Bazania, carried a report…

A: The unemployment rate is a measure of the percentage of the labor force that is unemployed and…

Q: If oil prices decline, the short-run aggregate supply curve shifts and output supplied will left;…

A: A fall in the price of oil leads to a fall in the cost of production for the producers in an…

Q: Consider the model: yt = α0 + b0st + b1st-1 + b2st-2 + b3st-3 + ut. What is the effect of a…

A: We will discuss concepts such as Finite distributed lag model and Long run multiplier to answer this…

Q: As you know, supply and demand shifts are caused by one of their determinants. Shifts in aggregate…

A: (1) Micro event : Demand curve shifts out (2) Macro event : AD shifts out (3) Micro issue : Supply…

Q: __________ refers to any situation in which disequilibrium is caused by one aspect of a society…

A: At the marketplace, disequilibrium is the situation when there is mismatch between the demand and…

Q: Figure 2-6 Baseballs A 200 150 C 100 50 %3D 100 200 300 400 Bananas an increase in immigrants who…

A: Given The figure 2-6. The question states: the movement from point C to point D was most likely…

Q: Difference between equilibrium and disequilibrium

A: Economics as a subject was developed since there was a limited amount of resources on earth. It…

Q: steps to correct the disequilibrium in the bop

A: Firstly the BOP stands for balance of payments. A plenty of things can be done to solve the problem…

Q: Discuss COVID-19 and its affect on our global economy.

A: COVID 19 impact on the global economy has been seen in the, unprecedent economic effects with the…

Q: Suppose the following consumption function. C=Co + C₁ (Y-T) Let Co = 15 C₁ = 0.58 1 = 79 G = 76 T =…

A: Consumption function:It is a relationship between consumption the income. As income increases,…

Q: An overheated economy is most likely to result in: price stability high inflation stagflation…

A: A country's economy often overheats when supply is less than the demand. The price of goods and…

Q: Explain Z-D model with the help of diagrams

A: The Z-D model was given by Keynes in the early 1930’s.

Q: Give a description of the Fama-French three factor model, and the equation of the model.

A: Fama and French three-factor model is an asset pricing model which will be adding risk size and…

Q: When the prodiction possibility curve bowd outwards from the origin

A: Production possibility frontier(PPF) shows different combination of two good or services that can be…

Q: Goodson Healthcare purchased a new sonogram imaging unit for $300,000 and a truck body and chassis…

A: The simplest method for estimating depreciation over time is straight-line depreciation. This…

Q: How do changes in consumer spending patterns impact the accuracy of short-term economic forecasting…

A: Consumer spending, often considered the backbone of many economies, reflects the total amount of…

Q: Question 8 Purchasing power parity (PPP) is the idea that one dollar buys you the same amount of…

A: Exports and Imports:In macroeconomics, the value of all the final products and services that are…

Q: Carefully examine and discuss the major differences of the Mundell Fleming Model in the short run as…

A: This economic model was first proposed (independently) by Robert Mundell and Marcus Fleming and is…

Q: Explain the difference between quantitative and qualitative forecasts

A: Qualitative forecasts are subjective in nature as they depend on the educated guesses of the…

Q: What are the implications of imbalances between injections and leakages?

A: In an economy, injections refer to the total amount of spending that enters the economy, while…

Q: The following table reflects demand data for a swimwear company in Phoenix. Using a naive forecast…

A: Seasonally Adjusted Demand refers to any recurring or repeated patterns observed within a data.…

Q: Suppose the economy is hit by a favorable aggregate demand shock. In response to this shock, the…

A: The increase in demand will be represented by a rightward shift in demand curve. A decrease in…

Q: Government-imposed taxes cause reductions in the activity that is being taxed, which has important…

A: Step 1 Given,

Q: Which of the following facts are evident from the seasonal plot of anti-diabetic drug sales below…

A: Seasonal plot as the name suggests is the graph that shows seasonal or cyclical variations of…

Q: dentify the effect of recession in the economy on either demand or supply curve and the equilibruim…

A: A recession is a situation where economic activities taking place in a country decreases and causes…

Q: Flow Injection Leakage Saving (S) Net taxes (NT) Exports (X) Investment spending (I) Government…

A: Injection in circular flow cause increase in income in flow . It includes Introduction of income.…

Q: In business forecasting using multiplicative decomposition which data component do you use to…

A: Business forecasting is the practice of making educated assumptions about particular business…

Q: State whether the following statement is true or false, and explain why. If the statement is…

A: Here the given statement is : If the national economy shrank at an annual rate of 4% per year for…

Q: Explain why the circular flow model is circular

A: The circular flow of money explains how money and goods are circulated between the household sector…

Q: Use this table to: (a) Plot AD and AS on a graph. (b) Where is the equilibrium price level and…

A: Aggregate demand and supply intersection is point where economy is said to be in equilibrium,…

Q: "The oil price run - up of 2007 - 08 was caused by strong demand confronting stagnating world…

A: If the oil price rises, then the cost of production will increase. Therefore, the supply of…

Q: An economy has an unemployment rate of 11% and real GDP grows by 2.5% annually. A treasury official…

A: Okun’s law gives the theoretical construct about the relationship between unemployment and GDP,…

Question

Please explain qu1 and the concept behind the CARA function

(a) What characterizes a CARA utility function? Give an example of such a utility
function and show why it is displays CARA.
(b) It can be shown that an investor with a CARA utility function who faces normally
distributed risk has preferences represented by:
a
E [u(w)] = E [w] - Var [w]
2
where w is wealth and a is a risk-aversion parameter. Suppose the investors
original wealth is given by wo and that there is a risky asset with rate of return
distribution r~ N(µ, σ²). There is also a risk-free asset with a rate of return rf.
The investor seeks to allocate x to the risky asset and wo x to the risk-free one.
What is the expected wealth and its variance resulting from this allocation?
(c) Find the optimal allocation x* and discuss how it depends on the model parame-
ters.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

What are the differences among models that forecast the level, trend, and seasonality?
This is an intermediate macroeconomics subject question. Please explain clearly.
Consider a national income model as: Y= C + I0 + G Y= National Income C= (Planned) Consumption Expenditure I0= Investment G= Government Expenditure Consider Y= 20trillion, G= 4.2trillion, I0= 3.8 trillion. Explain the key elements missing from the National Income model. Add a new endogenous variable to represent that missing element or endogenize one of the exogenous variables to address this issue. C= a+ b(Y-T0) (a>0, 0<b<1) G= gY (0<g<1)
An IS curve shows: (a) that realized savings are most likely a function of interest rates, because changes in interest rates result in changes in precautionary demand for money; (b) the combinations of investments and incomes that result in the supply and demand for money being equal to one another; (c) the locus of all combinations of interest rates and incomes that will result in realized investment and realized savings being equal to one another; (d) that increases in output typically are caused by increases in interest rates.
Define what the Transportation Services Index (TSI) is. Then explain why the Freight TSI is procyclical (i.e. rises and falls with GDP).
i need help with this macro econmics question 2
Please provide a complete and comprehensive solutions and answers. Solve for the Arithmetic Gradient: G= 2,000,000 pesos i= 11.50% n=15 years A= ?
What usually causes a positive disequilibrium rate? What usually causes a negative disequilibrium rate?
See Figure 2.2 and examine the model. Unlike other circular flow models, this model is missing another sector/s. what is the missing sector?
1. Which of the following equations is the correct expression of the IS curve? ao+Bo-B₁i+G a. Y = b. Y= C. d. Y= 1-α₁ (1-t) C+I+G Y = 1-a₁ (1-1) ao+Bo-B₁i+G 1+α₁ (1-t) C+I+G 1+a₁ (1-1)
When you copy a formula Excel erases the original copy of the formula O Excel edits cell references in the newly copied formula Excel adjusts absolute cell references Excel doesn't adjust relative cell references
Read Kiyotaki (1998). Consider the model in section 2 of the paper. Suppose there is no borrowing constraint (i.e., assume is arbitrarily large). Also assume that a = 1.2, B=0.9, y = 1.05, 8 = 0.1, and n = 4. (The notations of variables and parameters follow Kiyotaki (1998). Just in case, & denotes the lower case of Delta in the Greek alphabet.) Reference: Kiyotaki, N. (1998). "Credit and Business Cycles." The Japanese Economic Review, volume 49, issue 1, (You can obtain a free electronic copy of this article through the university library's website. If you do not know how, please ask the librarians.) Answer the following questions. pages 18-35.