ANSWER C AND D PLEASE ONLY Consider the following portfolio choice problem. The investor has initial wealth w and utility u(x) = (x^n) / n. There is a safe asset (such as a US government bond) that has net real return of zero. There is also a risky asset with a random net return that has only two possible returns, R1 with probability 1 − q and R0 with probability q. We assume R1 < 0, R0 > 0. Let A be the amount invested in the risky asset, so that w − A is invested in the safe asset. a) What are risk preferences of this investor, are they risk-averse, riskneutral or risk-loving? b) Find A as a function of w. c) Does the investor put more or less of his portfolio into the risky asset as his wealth increases? d) Now find the share of wealth, α, invested in the risky asset. How does α change with wealth?

ANSWER C AND D PLEASE ONLY Consider the following portfolio choice problem. The investor has initial wealth w and utility u(x) = (x^n) / n. There is a safe asset (such as a US government bond) that has net real return of zero. There is also a risky asset with a random net return that has only two possible returns, R1 with probability 1 − q and R0 with probability q. We assume R1 < 0, R0 > 0. Let A be the amount invested in the risky asset, so that w − A is invested in the safe asset. a) What are risk preferences of this investor, are they risk-averse, riskneutral or risk-loving? b) Find A as a function of w. c) Does the investor put more or less of his portfolio into the risky asset as his wealth increases? d) Now find the share of wealth, α, invested in the risky asset. How does α change with wealth?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 13QTD

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