Investors can choose one of the two independent investment assets, A and B. The payoff per unit invested in each asset is uniformly distributed with parameters as given below. A U(1, 1.1) B U(0.9, 1.2) Suppose that an investor with initial wealth of 1 chooses one of these assets based on the utility function u(x) — exp (−3x). = What are the certainty equivalents of the payoff per unit invested in nort assets A and B? Comment on their values when they are compared with the mean of the payoff per unit invested in A, B and when they are compared among themselves.
Investors can choose one of the two independent investment assets, A and B. The payoff per unit invested in each asset is uniformly distributed with parameters as given below. A U(1, 1.1) B U(0.9, 1.2) Suppose that an investor with initial wealth of 1 chooses one of these assets based on the utility function u(x) — exp (−3x). = What are the certainty equivalents of the payoff per unit invested in nort assets A and B? Comment on their values when they are compared with the mean of the payoff per unit invested in A, B and when they are compared among themselves.
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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Certainty equivalents in portfolio theory
Transcribed Image Text:Investors can choose one of the two independent investment assets, A and
B. The payoff per unit invested in each asset is uniformly distributed with
parameters as given below.
A
U(1, 1.1)
B
U(0.9, 1.2)
Suppose that an investor with initial wealth of 1 chooses one of these
assets based on the utility function u(x) - exp (−3x).
What are the certainty equivalents of the payoff per unit invested in nort
assets A and B? Comment on their values when they are compared
with the mean of the payoff per unit invested in A, B and when they
are compared among themselves.
=
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