1. An investor is provided with two assets to choose from: - Asset A: The return follows uniform distribution from 4% to 12%. - Asset B: The return is 4% or 12% with the same probability. a) Show that there is no first order stochastic dominance between assets A and B. [2 marks] b) Identify if there is second order stochastic dominance between assets A and B. [5 marks] c) The dependence structure between these two assets is unknown. Could we say anything about the absolute dominance relation between assets A and B ? [2 marks] You are further given that the investor makes decision using the utility function u(x)=ln(x). d) Show that the investor prefers asset A over asset B. [2 marks] e) If the initial capital of the investor increases, would the choice of the investor change? Explain your answer briefly. [2 marks] [Total: 13 marks] 1. An investor is provided with two assets to choose from: - Asset A: The return follows uniform distribution from 4% to 12%. - Asset B: The return is 4% or 12% with the same probability. a) Show that there is no first order stochastic dominance between assets A and B. [2 marks] b) Identify if there is second order stochastic dominance between assets A and B. [5 marks] c) The dependence structure between these two assets is unknown. Could we say anything about the absolute dominance relation between assets A and B ? [2 marks] You are further given that the investor makes decision using the utility function u(x)=ln(x). d) Show that the investor prefers asset A over asset B. [2 marks] e) If the initial capital of the investor increases, would the choice of the investor change? Explain your answer briefly. [2 marks] [Total: 13 marks]