Calculate the relative risk aversion of the two investors

Reference no: EM132179983

Question - Investor with wealth level Y₀ = $100 decides to invest his wealth in the market portfolio and risk-free security. The risk-free security provides a certain payoff of 3%. The market portfolio provides an uncertain payoff. Stock market's return in a good, average and bad year is 10%, 4% and -3% respectively. The probability of a good, average and bad year for stock market is 30%, 40% and 30% respectively. The utility function of the investor is U(Y) = In(Y) over final wealth.

a) Graph the expected utility of the investor as a function of his invested amount in the stock market.

b) Find the optimal dollar amount that should be invested in the stock market.

c) Another investor has an initial wealth of $200. How much should she invest in the stock market?

d) Calculate the relative risk aversion of the two investors and comment on their asset allocation decision.

Reference no: EM132179983

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