Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Matt has inherited a large sum of money wo and is deciding how much to invest in a low interest savings account with fixed rate
Matt has inherited a large sum of money wo and is deciding how much to invest in a low interest savings account with fixed rate of return rp = 0.1 and how much to invest in his friend's new business, which is a risky asset with random rate of return given by 5 -0.6 with prob. a = 0.4 C = 0.9 with prob. 1 = 0.6 Suppose Matt inherited wo = 8000 to invest and has a utility function over final portfolio value v given by u(v) = 20.6 (a) Calculate the optimal amount a* for Matt to invest in the risky asset. (b) Now suppose that wo = 20000 instead. Calculate the new optimal investment in the risky asset and compare to your answer in part (a). Is there a shortcut way to quickly determine, based on (a), how much Matt would invest in the risky asset when his wealth is higher? Matt has inherited a large sum of money wo and is deciding how much to invest in a low interest savings account with fixed rate of return rp = 0.1 and how much to invest in his friend's new business, which is a risky asset with random rate of return given by 5 -0.6 with prob. a = 0.4 C = 0.9 with prob. 1 = 0.6 Suppose Matt inherited wo = 8000 to invest and has a utility function over final portfolio value v given by u(v) = 20.6 (a) Calculate the optimal amount a* for Matt to invest in the risky asset. (b) Now suppose that wo = 20000 instead. Calculate the new optimal investment in the risky asset and compare to your answer in part (a). Is there a shortcut way to quickly determine, based on (a), how much Matt would invest in the risky asset when his wealth is higher
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started