Suppose the world can be described in two states, and two stocks are available with future per share prices: State XY 1 $10 $15 2 $20 $11 The current prices for stock X and Y are $13 and $10, respectively. a) Suppose now you have saved $3900 to invest in stocks (X and Y), what is your investment strategy to maximize your total wealth when the future is in State 1? b) Based on a), what is your investment strategy if you want to keep your future wealth as smooth as possible between the two States?

Suppose the world can be described in two states, and two stocks are available with future per share prices: State XY 1 $10 $15 2 $20 $11 The current prices for stock X and Y are $13 and $10, respectively. a) Suppose now you have saved $3900 to invest in stocks (X and Y), what is your investment strategy to maximize your total wealth when the future is in State 1? b) Based on a), what is your investment strategy if you want to keep your future wealth as smooth as possible between the two States?

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

Suppose the world can be described in two
states, and two stocks are available with
future per share prices: State X Y 1 $10 $15
2 $20 $11 The current prices for stock X and
Y are $13 and $10, respectively.
a) Suppose now you have saved $3900 to
invest in stocks (X and Y), what is your
investment strategy to maximize your total
wealth when the future is in State 1?
b) Based on a), what is your investment
strategy if you want to keep your future
wealth as smooth as possible between the
two States?

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