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Problem 3 - Investor Heterogeneity Assume there are two types of agents: I'd identical arbitrageurs with rational E4 Z = Zandt = 14 andVN identical
Problem 3 - Investor Heterogeneity Assume there are two types of agents: I'd identical arbitrageurs with rational E4 Z = Zandt = 14 andVN identical noise traders with biased EN Z - Z + 6 andt = IN. a) Solve for the equilibrium price in this economy. b) On the same graph, plot the equilibrium price against o for the following cases: a. Equal relative risk bearing capacity: VATA = VNIN; VNIN b. Marginal investor is an arbitrageur: VATA+VNON >0 ; VATA c. Marginal investor is a noise trader: -0. VATA+VNON c) Under what parameters are prices efficient? Optimistic? Pessimistic
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