This preview shows page 1. Sign up to view the full content.
Unformatted text preview: Problem 3. ( Standard ) Consider a consumers preference over K-tuples of K uncertain assets. De-note the random return on the k th asset by Z k . Assume that the random variables ( Z 1 , . . . , Z K ) are independent and take positive values with proba-bility 1. If the consumer buys the combination of assets ( x 1 , . . . , x K ) and if the vector of realized returns is ( z 1 , . . . , z K ) , then the consumers total wealth is K k = 1 z k x k . Assume that the consumer satisFes vNM assumptions, that is, there is a function v (over the sum of his returns) so that he maximizes the expected value of v . Assume that v is increasing and concave. The con-sumer preferences over the space of the lotteries induce preferences on the space of investments. Show that the induced preferences are monotonic and convex....
View Full Document
This note was uploaded on 12/29/2011 for the course ECO 443 taught by Professor Aswa during the Fall '10 term at SUNY Stony Brook.
- Fall '10