Question

Diversifying Investments Problem Set due Aug 3, 2020 18:30 CDT Bookmark this page Problem PS9.3.1 6/6 points (graded) David has an endowment of $10,000 that he wants to invest in the stockmarket, which consist of two firms, A and B. Each firm's stock is worth $100 today, and will be worth $140 in one year with probability į or will stay at $100 with probability Ż. Assume that the evolution of both stocks is independent: that is, the probability that stock A rises in value does not vary or depend on what has happened to stock B, and vice-versa. Finally, assume that David's utility function is U (w) = vw, and interest rate is zero. What is David's utility of not investing? (In this and the following questions, include the wealth endowment in your calcuations.) UN

Answer 1

Davis's utiltiy of not investing = u(money when not invested)

= (10000)^1/2

= 100