David has an endowment of $10,000 that he wants to invest in the stockmarket, which consist of
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Question:
David has an endowment of $10,000 that he wants to invest in the stockmarket, which consist of two firms, A and B. Each firm's stock is worth $100 today, and will be worth $140 in one year with probability1/2 or will stay at $100 with probability1/2. Assume that the evolution of both stocks is independent: that is, the probability that stock A rises in value does not vary or depend on what has happened to stock B, and vice-versa. Finally, assume that David's utility function isU(w)=w^(1/2), and interest rate is zero. (In this and the following questions, include the wealth endowment in your calcuations.)
Calculate the expected value and David's expected utility of investing solely in stock A and solely in stock B.
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