What is the optimal amount of risky assets, Financial Management

Consider a world with two assets: a riskless asset paying a zero interest rate, and a risky asset whose return r can take values +10% or -8% with equal probability. An individual has preferences represented by the utility function u(x) = ln x and an initial wealth w0 = 10.

a) Solve the portfolio choice problem of the agent. What is the optimal amount z* of risky assets?

Assume now that the agent also faces an exogenous additive background risk ε, with a distribution independent of r, that can take values +4 or -4 with equal probability (additive means that the agent's final wealth x is given by the portfolio of assets plus ε).

b) Show that this background risk reduces the demand for risky assets.

Posted Date: 5/6/2013 1:34:27 AM | Location : United States







Related Discussions:- What is the optimal amount of risky assets, Assignment Help, Ask Question on What is the optimal amount of risky assets, Get Answer, Expert's Help, What is the optimal amount of risky assets Discussions

Write discussion on What is the optimal amount of risky assets
Your posts are moderated
Related Questions

Taxonomy of financial intermediaries We start by looking at the USA, the largest economy and financial system in the world. Subsequently we will turn to other countries. In the

What is Inventory turnover The shortcoming of this ratio is that average calculation based on beginning and year-end inventory may not represent actual average in year. Other l

In addition to management quality, an assessment of the financial capacity of a company should also include an evaluation of trends, regulatory environment, basic

Effect on Exchange Rates As we know, one of the most vital determinants of changes in relative exchange rates is the relative inflation rate. Assuming a free and open market, i

Japanese banks borrow in yen and purchase spot dollars from their Western counterparties. Therefore the Western banks are left holding the yen for the time of the loan (three month

Q. Benefits of the proposed policy change? Short-term sources of debt finance comprise overdrafts and short-term loans. An overdraft offers elasticity but since it is technical

Question 1: (a) Explain fully the difference between ‘Pay-As-You-Use' and ‘Pay-As-You-Go' methods of financing infra-structural projects. (b) Write short notes on any ONE of

The term 'Eurobonds' refers to bonds issued and sold outside the home country of the currency. For example, a dollar denominated bond issued in the UK is a Euro (

Your company is preparing to borrow $1,750,000 on a 3-year, 10%, annual payment, fully amortized term loan. What fraction of the payment made at the end of the second year will sho