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(c) An investor with log utility uwx+1)= In we+1) can invest in a stock which currently has price 100. It will either go up to
(c) An investor with log utility uwx+1)= In we+1) can invest in a stock which currently has price 100. It will either go up to 130 or down to 90, with probability 1/2 of each event. (Imagine the two states as up state y and down state d.He can also invest in a bond, which pays zero interest. i. Work out a discount factor m4+1 that prices the stock and bond. [4 marks] ii. Work out the return of the investor's optimal portfolio in the two [3 marks iii. Formulate the portfolio that gets the return in i above [5 marks) states. (c) An investor with log utility uwx+1)= In we+1) can invest in a stock which currently has price 100. It will either go up to 130 or down to 90, with probability 1/2 of each event. (Imagine the two states as up state y and down state d.He can also invest in a bond, which pays zero interest. i. Work out a discount factor m4+1 that prices the stock and bond. [4 marks] ii. Work out the return of the investor's optimal portfolio in the two [3 marks iii. Formulate the portfolio that gets the return in i above [5 marks) states
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