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Unformatted text preview: ECN 712 Fall 2008 Professor Schlee Final Examination Instructions : Attempt all questions and write your answers in the blue books provided. There are 110 points on the exam, one for each minute of the exam period. Allocate your time carefully. 1. (25 points) Consider the twoasset portfolio problem, max R + Z u ( w + x ) dF t ( x ) , where w > 0 is the initial wealth, is wealth invested in a risky asset with realized rate of return, x , and, for t = 0 , 1, F t is a cumulative distribution function (cdf) with bounded support. The safe asset has a rate of return of 0. (Note that investment in the safe asset can be negativethe asset can be sold short.) The vNM utility u on R is thrice continuously differentiable with u > 0 globally. For t = 0 , 1, let t solve this problem and assume throughout that Z xdF t ( x ) > . (a) (10) Show that t > 0 (for either t = 0 or t = 1). (b) (15) Suppose that F is strictly riskier than F 1 . 1 i. Identify a condition on u which ensures that 1 (a decrease in risk raises investment). For a vNM utility satisfying your condition, prove that indeed 1...
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This note was uploaded on 11/19/2010 for the course ECON 202 taught by Professor Schlee during the Spring '10 term at ASU.
 Spring '10
 schlee
 Microeconomics

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