Question
Q1. Suppose that you are a ventured capitalist and you are considering two possible investment alternatives for the coming year. The first alternative is
Q1. Suppose that you are a ventured capitalist and you are considering two possible investment alternatives for the coming year. The first alternative is to buy Treasury Bills, which will give you a return of 2% for sure. The second alternative has three possible outcomes. It will produce returns 15%, 5% and r% with probabilities 0.3, 0.3 and 0.4 respectively. Your utility function for wealth is U(x) = 2x for x 0. (a) (b) Find 7 such that the two investments are indifferent. Given that r = -20%. Suppose that you can allocate a certain (positive) proportion of your wealth into the two investments. Use Solver or otherwise to determine the optimal investments mix such that your expected utility is maximized? (c) Find the certainty equivalent of the optimal mix.
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