Let’s say that you have amount of 1 to invest and there are two types of financial assets: asset…

Question:

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Let’s say that you have amount of 1 to invest and there are two types of financial assets:

asset A is risk-free and current price is 1 (short selling allowed) and price next period price is

going to duplicate (100% increase). Risky asset pays no dividens and short selling not

allowed. Risky asset’s current price is 1 and next period Y, that is a random variable with

distribution Y = 1 probability A₁Y = 2 probability A2; Y = 3 probability A3 (Always positive

returns)

What is the amount invested in risky financial asset using

U(rate portfolio) = 1 – exp(-b* rate portfolio), when b>0?

Expert Answer:

Answer rating: 100% (QA)

To determine the amount invested in the risky financial asset using the utility function U rate portfolio 1 exp b rate portfolio where b 0 we need to

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