Question
Suppose that there are three dates t=0,1,2. There are two assets a long lived riskless asset and short-lived risky asset. The long lived asset is
Suppose that there are three dates t=0,1,2. There are two assets a long lived riskless asset and short-lived risky asset. The long lived asset is trade-able at both t=0 and t=1. It has a return of R between t=0 and t=1. Between t=1 and t=2 this asset has a riskless return of R2, with R1 E0[W21-Y/1-Y] Where W2 denotes wealth at t=2. Determine the agents demand for the risky asset(expressed as a fraction of initial wealth). Explain why the agent would demand a risky asset.
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