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

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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: yfchow@cuhk.edu.hk FIN 4160 Intermediate Financial Theory Assignment 1 Due Date: October 5, 2009 An assignment where you should begin to appreciate mathematics and why f 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
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This note was uploaded on 01/15/2010 for the course FIN FIN4160 taught by Professor Prof.chow during the Fall '09 term at CUHK.

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

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