Completed quickly and followed instructions given. Grammar, spelling, etc. was all good as well. Thank you so much! Will hire in the future.
3. Fred has $W to invest. He is considering investing in a defense company, Zee Co. If Zee Co is awarded a new defense contract, then the value of any investment in Zee Co will double. However, if it does not receive a new contract then the value of the investment will be cut in half. Fred believes that it is equally likely that Zee Co will receive the new contract. Finally assume that his preferences over his investment (x) can be represented by the utility function u(x) = ln x.
For parts (a) – (c) Assume that Fred has put all of his money in Zee Co (so he has invested $W in Zee Co).
a) What is the expected value of his investment (as a function of W)? What is his expected utility of his investment?
b) What is the certainty equivalent to his investment (as a function of W)? What is the risk premium?
c) Illustrate his utility function and the expected utility of his investment in a diagram. Label the expected value, the certainty equivalent and the risk premium.
d) If his only options are investing all of his money in Zee Co or keeping his money in cash (where it will have a certain value of $W) which (if any) would he prefer?
For parts (e) – (g) below assume that Fred may put any fraction, α, of his $W in Zee Co. The remaining fraction, (1-α)W, will be kept in cash. Assume that the returns on money put in Zee Co and the associated probabilities are as above.
e) Write his expected utility function as a function of α. Write the FOC associated with Fred’s expected utility maximization problem.
f) Show that at α=0 the first derivative of expected utility is positive (i.e. 0 does not solve the FOC). Briefly explain why this is not a surprising result.
g) What is the value of α that maximizes his expected utility?
Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.Read more
Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.Read more
Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.Read more
Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.Read more
By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.Read more