Question
Suppose that you consider the consumption preferences of an investor with initial endowment equal to 50,000$. The preferences of this investor are characterized by the
Suppose that you consider the consumption preferences of an investor with initial endowment equal to 50,000$. The preferences of this investor are characterized by the following indifference curve:
U=c0 c1 the slope of which is equal to: dc1/dc0 = - c1/c0.
Moreover, the available investment opportunity set is expressed through the following equation: c1 = g(c0) = 150 (50,000 c0^)0.5.
The risk free interest rate is equal to 10%. 4.1) Which is the optimal financing decision? Explain your answer analytically.
4.2) What are the implications of your finding for modern portfolio theory and specifically how your findings are related to the Separation Fund Theorem of portfolio theory?
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