What amounts will the investor invest in the primitive asset

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Reference no: EM132818175

Assume there are two periods (t=0 and t=1) and two possible states of the world at t=1 (i.e., s=2), with state 1 probability=π1=0.35 and state 2 probability=π2=0.65. An investor has a time-separable utility of wealth U(W) = 8 - W2, and an initial wealth of W0=100 Euros. There are two primitive assets pt1 and pt2 with the prices of P1=0.74 and P2=0.22.

Problem 1: What amounts will the investor invest (at t=0) in the primitive assets of type 1?

Reference no: EM132818175

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