An individual has utility function U-bln(C) where b is a parameter, C is consumption. The individual...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
An individual has utility function U-bln(C) where b is a parameter, C is consumption. The individual is choosing consumption over two periods and her subjective discount factor (0) is 0.9. Her consumption this period is 10 and for next period E(1/C+1) is 1/11 and the covariance of 1/C+1 with the asset pay-off is -0.5/b. She can buy an asset today at price P with an expected pay-off next period (E(X+1)) of 11. (a) What is the price of the asset in terms of b if she is maximising utility? (7 marks) (b) Suppose that b varies with the growth of consumption. Examine what are the implication of this for the risk premium on the asset (6 marks) (c) Discuss the results of b chanaina with arowth rates of consumption in the context of time-varving expected returns on risky assets (12 marks) An individual has utility function U-bln(C) where b is a parameter, C is consumption. The individual is choosing consumption over two periods and her subjective discount factor (0) is 0.9. Her consumption this period is 10 and for next period E(1/C+1) is 1/11 and the covariance of 1/C+1 with the asset pay-off is -0.5/b. She can buy an asset today at price P with an expected pay-off next period (E(X+1)) of 11. (a) What is the price of the asset in terms of b if she is maximising utility? (7 marks) (b) Suppose that b varies with the growth of consumption. Examine what are the implication of this for the risk premium on the asset (6 marks) (c) Discuss the results of b chanaina with arowth rates of consumption in the context of time-varving expected returns on risky assets (12 marks)
Expert Answer:
Answer rating: 100% (QA)
a The price of the asset is given by P EX118 P 11109 P 1222 b If b varies with the growth of con... View the full answer
Related Book For
Elementary Linear Algebra with Applications
ISBN: 978-0471669593
9th edition
Authors: Howard Anton, Chris Rorres
Posted Date:
Students also viewed these finance questions
-
T: M22 M23, where B is a fixed 2 3 matrix and T(A) = AB. Determine whether the function is a linear transformation. Justify your answer.
-
Express the equation y = b, where b is a constant, in plane polar coordinates.
-
If A Is a where B is a close f sebut of B subset of IR, show that
-
Prepare an adjusted trial balance on May 31. Wildhorse's Hotel opened for business on May 1, 2022. Its trial balance before adjustment on May 31 is as follows. Account Number 101 126 130 140 141...
-
Why have technological advances hindered the enforcement of legal restrictions on bank branching?
-
Below are some terms commonly found in a management setting. Are they concepts or constructs? Give two different operational definitions for each. a) First-line supervisor b) Employee morale c)...
-
The fiscal year 2017 annual report of General Mills, Inc. is available on this book's Website. Refer to the consolidated balance sheet, and Note 8. Required a. What was the total dollar amount of...
-
Phung, CPA, has been engaged to audit the financial statements of Vernon Distributors, Inc., a continuing audit client, for the year ended September 30. After obtaining an understanding of Vernons...
-
AutoSave Off H Document2 - Word Search (Alt+Q) File Home Insert Design Layout References Mailings Review View Help Calibri (Body) v 11 A A Aa A E* E * F * T Paste Clipboard BI U b x x A - D A Font...
-
Newton Company manufactures and sells one product. The company assembled the following projections for its first year of operations: Variable costs per unit: Manufacturing: Direct materials . . . . ....
-
discuss the implications of pleiotropy and genetic correlation on the evolution of complex phenotypes, and how these factors impact the trade-offs among different traits within an organism ?
-
A jacket potato vendor charges $4.90 per potato sold. The variable cost of each potato served is 1.03. The stall has a foced cost of $600 per week A potato shortage results in an increased variable...
-
Randall Dahlin was charged with bank robbery. He testified he was babysitting his infant niece at the time of the robbery and was "deeply devoted to his niece and his family" and would never would...
-
Ike's Dog Kennel provides day and overnight care for all pets. The following account balances relate to the Company's October 31, 2021 financial statements: Maintenance expense Equipment $6,000...
-
You throw a small stone straight up in the air. Your hand accelerates it upwards from rest at ground level with an acceleration a = 5.7, moving the stone upwards a distance h = 1.2 m. The stone then...
-
Describe your target audience using demographics based on your secondary and primary research to date. Explain how intemal and external organizational factors might influence the target demographic...
-
Pure zinc, sand cast (Specimen Xl) Structure is visible by eye that relatively long, columnar poly-crystals radiates in towards the center of the bar. The grains show varying degrees of brightness...
-
Write a paper by answer the following question: Should Recycling Be Mandatory?
-
(a) Find all 2 Ã 2 matrices whose nullspace is the line 3x - 5y = 0 (b) Sketch the nullspaces of the following matrices: 0 0 2 4 5 0 9 1
-
Determine the dimension of and a basis for the solution space of the system. x1 - 3x2 + x3 = 0 2x1 - 6x2 + 2x3 = 0 3x1 - 9x2 + 3x3 = 0
-
Repeat the directions of Exercise 13 using the inner product of Exercise 3. x = (1, 1), y = (i, - i)
-
Refer to the Action feature, Channel Stuffing, on page 19. Suppose that performance bonuses based on revenues were eliminated and this behavior ceases. Would you favor eliminating performance-based...
-
Refer to the Action feature, Palliative Care Unit, on page 5. What type of costs in a hospital might be difficult to split between the PCU and non-PCU areas? What type of costs would be easy to...
-
Place the letter of the appropriate accounting cost in Column 2 in the blank next to each decision category in Column 1. Column 1 Analyzing executive performance Determining whether to produce...
Study smarter with the SolutionInn App