Consider a Kyle (1985) model where the true value of the stock is $30, the unconditional variance of the true value is 25, the variance of uninformed trading is 3600 and the unconditional expected value ofthe stock is $25, i.e., E[ü] = 25, 0(2)/(3) = 25 = 30,0, = 3600. 1)The informed trader's optimal demand (based on the model) is: A. 60 B. 55 C. 65 D. 70 2) The informed trader's ex- ante profit is: A. 180 B. 200 C. 150 D. 120 3) If noise trading u = -20. then price p is: A. 25.50 B. 26.68 C. 30.50 D. 28.50 4)Market maker's realized profit is_ and informed trader's realized profit is.-132.80; 199.20 B. -132.80; 132.80 C. 199.20; 199.20 D. 152.50; 165.50A

The informed trader's optimal demand (based on the model) is calculated using the Kyle (1985) model…

Answered: Consider a Kyle (1985) model where the…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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An investor can design a risky portfolie based on two stocks A and B. Stock À has an expected retun of 18% and a standard deviation of return of 25% . Stock B has an expected return of 14% and a standand deviation of return of 30% the correlation coefficient between the return of A and B is 0.50 what is the optimal wieght of the maximum variance stock that should be held to this protfolio ? A) 32% B) 39 C) 61% D) 68%
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