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Calculate the expected return

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Suppose a bank can offer an asset that is more liquid, with gross returns Rd1 = 1:33 and Rd2 = 1:71 (depending on the time of liquidation).

1. Calculate the expected return (from a t = 0 perspective) of depositing with this bank. How does it compare to the expected return from direct investing?

2. Calculate the expected utility (from a t = 0 perspective) derived from depositing with the bank. Do you conclude that people would prefer banking to direct investing at t = 0?

3. Calculate the bank's profit after t = 2. In other words, what amount of funds remains at the bank once all depositors have withdrawn?

Reference no: EM133063781

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