Suppose that Eleanor has utility function u(w) = ln(w) and initial wealth wo = 450. She has the opportunity to invest in two different assets, one risky and one safe. • The safe asset yields a return of 1.02 dollar for every dollar invested with probability 1 (so that r = 0.02). •The risky asset yields a return of 1 + x for every dollar invested, where x is the lottery x = 7 3 10 0.42 -0.58 (a) Solve Eleanor's portfolio problem to find the optimal amount of money invested in the risky asset, given by a, and the optimal amount of money invested in the safe asset, given by wo - a.
Suppose that Eleanor has utility function u(w) = ln(w) and initial wealth wo = 450. She has the opportunity to invest in two different assets, one risky and one safe. • The safe asset yields a return of 1.02 dollar for every dollar invested with probability 1 (so that r = 0.02). •The risky asset yields a return of 1 + x for every dollar invested, where x is the lottery x = 7 3 10 0.42 -0.58 (a) Solve Eleanor's portfolio problem to find the optimal amount of money invested in the risky asset, given by a, and the optimal amount of money invested in the safe asset, given by wo - a.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Suppose that Eleanor has utility function u(w) = In(w) and initial wealth wo = 450.
She has the opportunity to invest in two different assets, one risky and one safe.
• The safe asset yields a return of 1.02 dollar for every dollar invested with probability
1 (so that r = 0.02).
• The risky asset yields a return of 1 + ữ for every dollar invested, where is the
lottery
3
10
10
0.42 -0.58
(a) Solve Eleanor's portfolio problem to find the optimal amount of money invested in
the risky asset, given by a, and the optimal amount of money invested in the safe
asset, given by wo – a.
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