QUESTION 3 Matt has inherited a large sum of money wo and is deciding how much to invest in a low interest savings account with fixed rate of return r f = 0.1 and how much to invest in his friend's new business, which is a risky asset with random rate of return ã given by with prob. 7 = 0.4 with prob. 1 – T = 0.6 S-0.6 0.9 Suppose Matt inherited wo 8000 to invest and has a utility function over final portfolio value v given by u(v) = =20.6. (a) Calculate the optimal amount a* for Matt to invest in the risky asset. (b) Now suppose that wo 20000 instead. Calculate the new optimal investment in the risky asset and compare to your answer in part (a). Is there a shortcut way to quickly determine, based on (a), how much Matt would invest in the risky asset when his wealth is higher?
QUESTION 3 Matt has inherited a large sum of money wo and is deciding how much to invest in a low interest savings account with fixed rate of return r f = 0.1 and how much to invest in his friend's new business, which is a risky asset with random rate of return ã given by with prob. 7 = 0.4 with prob. 1 – T = 0.6 S-0.6 0.9 Suppose Matt inherited wo 8000 to invest and has a utility function over final portfolio value v given by u(v) = =20.6. (a) Calculate the optimal amount a* for Matt to invest in the risky asset. (b) Now suppose that wo 20000 instead. Calculate the new optimal investment in the risky asset and compare to your answer in part (a). Is there a shortcut way to quickly determine, based on (a), how much Matt would invest in the risky asset when his wealth is higher?
Algebra & Trigonometry with Analytic Geometry
13th Edition
ISBN:9781133382119
Author:Swokowski
Publisher:Swokowski
Chapter7: Analytic Trigonometry
Section7.6: The Inverse Trigonometric Functions
Problem 94E
Related questions
Question
please see photo, cant write notation in text box
Transcribed Image Text:QUESTION 3
Matt has inherited a large sum of money wo and is deciding how much to invest in a low interest savings
account with fixed rate of return rf
0.1 and how much to invest in his friend's new business, which is a
risky asset with random rate of return ã given by
S-0.6 with prob. 7 = 0.4
with prob. 1 – T = 0.6
0.9
Suppose Matt inherited wo
:8000 to invest and has a utility function over final portfolio value v given by
u(v) = v0.6.
(a) Calculate the optimal amount a* for Matt to invest in the risky asset.
(b) Now suppose that wo
20000 instead. Calculate the new optimal investment in the risky asset and
compare to your answer in part (a). Is there a shortcut way to quickly determine, based on (a), how much
Matt would invest in the risky asset when his wealth is higher?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps with 2 images
Recommended textbooks for you
Algebra & Trigonometry with Analytic Geometry
Algebra
ISBN:
9781133382119
Author:
Swokowski
Publisher:
Cengage
Algebra & Trigonometry with Analytic Geometry
Algebra
ISBN:
9781133382119
Author:
Swokowski
Publisher:
Cengage
Intermediate Algebra
Algebra
ISBN:
9781285195728
Author:
Jerome E. Kaufmann, Karen L. Schwitters
Publisher:
Cengage Learning
College Algebra
Algebra
ISBN:
9781305115545
Author:
James Stewart, Lothar Redlin, Saleem Watson
Publisher:
Cengage Learning