I have to solve this problem:Can you help me with question 2 ? Consider an investor with initial wealth yo, who maximizes his expected utility from finalwealth, E[u(ỹ₁)]. This investor can invest in two risky securities, 1 and 2, with random returnĩ₁ and ĩ₂. Those risky returns are two binomial variables. More specifically, with probability1/2 we have r₁ = r + A and ₂ = r, and with probability 1/2 we have ₁ = r and r₂ = r + d₂where r > 0 and A > 6.We assume that this investor has following preferences,u(y) = ln(y)1. For a given fraction, a, of the initial wealth, invested in risky security 2, what is thedistribution of final wealth, ỹ₁?2. Determine the fraction amin which minimizes the variance of ỹ₁. What is the varianceof that particular portfolio?3. Determine the expression of E[u(ỹ₁)] as a function of a.

In the study of economics, the term utility can be defined as the total satisfaction or benefit that…

Consider an investor with initial wealth yo, who maximizes his expected utility from final wealth, E[u(ỹ₁)]. This investor can invest in two risky securities, 1 and 2, with random return ₁ and ₂. Those risky returns are two binomial variables. More specifically, with probability 1/2 we have ř₁ = r + A and r₂ = r, and with probability 1/2 we have Ỹ₁ = r and r₂ = r + d₂ where r> 0 and A > 6. We assume that this investor has following preferences, u(y) = ln(y) 1. For a given fraction, a, of the initial wealth, invested in risky security 2, what is the distribution of final wealth, ỹ₁? 2. Determine the fraction amin which minimizes the variance of ỹ₁. What is the variance of that particular portfolio?

Consider an investor with initial wealth yo, who maximizes his expected utility from final wealth, E[u(ỹ₁)]. This investor can invest in two risky securities, 1 and 2, with random return ₁ and ₂. Those risky returns are two binomial variables. More specifically, with probability 1/2 we have ř₁ = r + A and r₂ = r, and with probability 1/2 we have Ỹ₁ = r and r₂ = r + d₂ where r> 0 and A > 6. We assume that this investor has following preferences, u(y) = ln(y) 1. For a given fraction, a, of the initial wealth, invested in risky security 2, what is the distribution of final wealth, ỹ₁? 2. Determine the fraction amin which minimizes the variance of ỹ₁. What is the variance of that particular portfolio?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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