course: advanced microeconomics An individual has 1 Dollar to invest. Her mean-variance utility function is U = M-V, where M is theportfolio's mean and V is its variance. There are three risky assets with means ₁ = µ2 = µ3 = 1% andstandard deviations $1 = S2 = S3 = 1. The correlation between the returns on assets 1 and 2 is P12, where−1 ≤ P12 ≤ 1, but P12 # 0. The returns on assets 1 and 3 and 2 and 3 are uncorrelated (P13 = P23 = 0).Denote the effect of a change in the correlation P12 on the demands for assets asdxi i = 1,2,3. Then,dp12'we have:(a) > 0,dx₁dp12dx₁ <0,dx2dp12> 0, but(b) dp 12(c)dx₁ <0,dp12(d) the signs ofdx20, butdp12dx2 < 0,dp12dx₁dp12 •dx3dp 12dx3dp12dx3dp12butdx2 anddp 12<0>00=da3 depend on the sign of P12dp12

Given that, an Individual has 1 dollar to invest. There are 3 risky assets and return on assets 1…

Answered: dai, i=1,2,3. dp12 Denote the effect of…

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dai, i=1,2,3. dp12 Denote the effect of a change in the correlation P12 on the demands for assets as

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.8P

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