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Consider a risk - averse investor with the power preferences ( where denotes the risk aver - sion magnitude ) and an initial fund value
Consider a riskaverse investor with the power preferences where denotes the risk aver
sion 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 Consider an alternative scenario where is not predetermined therefore the valu
ation 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 through
out the pricing procedure and provide methodological approaches used to address
the considerations. Structure the answers under separate bullet points.
Q What is optimal allocation of funds to the risky investment? Your answer should
only provide the fraction or overall fund allocated.
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