A. Derive an expression for the expectation of an Investor's next-period wealth if he invests a...
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A. Derive an expression for the expectation of an Investor's next-period wealth if he invests a proportion a of his current wealth w in Equity A (which pays-8% or +12%, with respective probabilities 4 and 4) and the rest in a noninterest-bearing bank account. [7 Marks] B. An investor faces three assets with the following details. Asset A pays him ZMW20 with probability 0.3, ZMW19 with probability 0.2, and ZMW16 with probability 0.5. Asset B pays him ZMW16 with probability 0.2, ZMW17 with probability 0.4, and ZMW15 with probability 0.4. Asset C pays him ZMW18 with probability 0.4, ZMW17 with probability 0.4, and ZMW19 with probability 0.2 REQUIRED i) Formulate a Probability Mass Functions (PMF) for the three assets. [3 Marks] ii) Construct the Cumulative Distribution Functions (CDF) for the three assets. [3 Marks] iii) which asset between asset A and asset B should the investor choose based on first order stochastic dominance? Explain [3 Marks] iv) Which asset between asset A and asset C should the investor choose based on first order stochastic dominance? Explain. [3 Marks] v) Which asset between asset B and asset C should the investor choose based on first order stochastic dominance? Explain. [3 Marks] A. Derive an expression for the expectation of an Investor's next-period wealth if he invests a proportion a of his current wealth w in Equity A (which pays-8% or +12%, with respective probabilities 4 and 4) and the rest in a noninterest-bearing bank account. [7 Marks] B. An investor faces three assets with the following details. Asset A pays him ZMW20 with probability 0.3, ZMW19 with probability 0.2, and ZMW16 with probability 0.5. Asset B pays him ZMW16 with probability 0.2, ZMW17 with probability 0.4, and ZMW15 with probability 0.4. Asset C pays him ZMW18 with probability 0.4, ZMW17 with probability 0.4, and ZMW19 with probability 0.2 REQUIRED i) Formulate a Probability Mass Functions (PMF) for the three assets. [3 Marks] ii) Construct the Cumulative Distribution Functions (CDF) for the three assets. [3 Marks] iii) which asset between asset A and asset B should the investor choose based on first order stochastic dominance? Explain [3 Marks] iv) Which asset between asset A and asset C should the investor choose based on first order stochastic dominance? Explain. [3 Marks] v) Which asset between asset B and asset C should the investor choose based on first order stochastic dominance? Explain. [3 Marks]
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Related Book For
Financial Theory and Corporate Policy
ISBN: 978-0321127211
4th edition
Authors: Thomas E. Copeland, J. Fred Weston, Kuldeep Shastri
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