- 3. (25 points) An investor has preferences represented by the following utility function: u(c) = vc. He has an initial

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3 25 Points An Investor Has Preferences Represented By The Following Utility Function U C Vc He Has An Initial 1 (54.42 KiB) Viewed 91 times

- 3. (25 points) An investor has preferences represented by the following utility function: u(c) = vc. He has an initial endowment w >0 at time 0 and nothing at time 1. He invests at time 0 and consumes at time 1 only. He can invest an amount in a risky asset that pays off 2 (fór each unit invested) with probability = = 0.6 and 0 with the complementary probability. He can also invest in a risk-free asset that pays off 1.1 for sure. a) Does the investor have decreasing, constant or increasing absolute risk aversion? 1 b) Is the investor willing to invest a positive amount o in the risky asset, for any level of w? c) Suppose w= 10. Compute the optimal investment in the two assets. d) Suppose w= 20. Is the fraction of the risky asset higher, the same of lower than that computed for question c)? Explain.