3 An investor lives for 2 periods and has the utility function u defined over thefinal wealth as u (w) = 7?c; + B (yE (w) – r²V (w)). The investor isborn at t = 0 with wealth wo = 2 and wants to choose a portfolio whichmaximizes her final wealth w1, which you will recognize is a random variable.There are two assets that the investor can invest in - (i) a bond which pays a surereturn 0.01 , and (ii) a stock which follows a Normal distribution N (0.02,0.08). The investor must also eat at time t = 0, and her consumption is co.The discount rate is given by ß = 0.897, and her risk aversion is given by y =3.2. Find her optimal consumption which maximizes her utility.

The investor aims to maximize her utility over two periods with a utility function based on final…

Answered: Find her optimal consumption which…

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Find her optimal consumption which maximizes her utility.

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

An investor lives for 2 periods and has the utility function u defined over the
final wealth as u (w) = 7?c; + B (yE (w) – r²V (w)). The investor is
born at t = 0 with wealth wo = 2 and wants to choose a portfolio which
maximizes her final wealth w1, which you will recognize is a random variable.
There are two assets that the investor can invest in - (i) a bond which pays a sure
return 0.01 , and (ii) a stock which follows a Normal distribution N (0.02,
0.08). The investor must also eat at time t = 0, and her consumption is co.
The discount rate is given by ß = 0.897, and her risk aversion is given by y =
3.2. Find her optimal consumption which maximizes her utility.

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