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F4160A1

# F4160A1 - Prof Chow Ying-Foon Ph.D Room 201A Leung Kau Kui...

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Prof. Chow Ying-Foon, Ph.D. Room 201A, Leung Kau Kui Building Department of Finance The Chinese University of Hong Kong 2009—2010 First Term Phone: (+852) 2609 7638 Fax: (+852) 2603 6586 Email: [email protected] FIN 4160 Intermediate Financial Theory Assignment 1 Due Date: October 5, 2009 An assignment where you should begin to appreciate mathematics and why fi nance professors may be smart but not necessarily rich. Answer the following questions for a total of 100 points (questions are equally weighted) and show all your work carefully. 1. The Robinson Crusoe Farming Corporation faces the following real/productive invest- ment opportunity set: F ( Y 0 , Y 1 ) = (100 Y 0 )(1 . 07 + 0 . 0003 Y 0 ) Y 1 = 107 1 . 04 Y 0 0 . 0003 Y 2 0 Y 1 = 0 where Y 0 represents current-period dollars and Y 1 corresponds to end-of-year dollars resulting from the investment in its farming operation. a. There is no capital market; however, Robinson Crusoe has assessed his utility for current and future consumption, which is as follows: U ( C 0 , C 1 ) = C 2 0 C 1 . Solve for the optimal level of real investment for Robinson Crusoe. (Hint: Robinson Crusoe’s current wealth is found by solving F ( Y 0 , Y 1 ) for Y 0 where Y 1 = 0 .) b. Using the same real investment opportunity set and utility function as in part (a),

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F4160A1 - Prof Chow Ying-Foon Ph.D Room 201A Leung Kau Kui...

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