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Consider a risk - averse investor with the power preferences ( where denotes the risk aversion magnitude ) and an initial fund value of W
Consider a riskaverse investor with the power preferences where denotes the risk aversion magnitude and an initial fund value of at date The investment environment offers two alternatives to the investors including: i a safe asset with a fixed riskfree rate per invested unit between dates and ; and ii common equity share of a private company. The equity return involves risk depending on the future company's performance. Consider that the company's dividend per share value summarises the performance and follows a Normal distribution with for any future date
Q Assume a scenario where is not predetermined therefore the valuation depends upon the optimal value of the allocation to each asset. Assume the noarbitrage condition and discuss the steps the investors undertakes to compute the optimal value The answer is expected to identify main considerations throughout the pricing procedure and provide methodological approaches used to address the considerations. Structure the answers under separate bullet points.
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