Solutions to Problem Set 1

Write down the meanvariance criterion as a function

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Unformatted text preview: u invest in N of these projects, what is the mean and the variance of the total profit? [Hint: Use the results from Question 1b]. Mean = N/2. Variance = 3N2/4 1 c) Suppose that you want to maximize the mean ­variance criterion E [ X ] " Var( X ) 2 (in terms of the class slides, we are assuming parameters α=1, β=½). Write down the mean ­variance criterion as a function of the number of projects N. ! N/2 3N2/8. d) How many projects should you invest if you want to maximize the mean ­variance criterion? [Hint: You may want to use Excel to calculate the criterion for different numbers of projects N=0,1,2,3,4,5,…]. 1. Question 3. Consider the automobile accident example presented in class (see Lecture 1 slides). a) What is the VaR at level 1%? 10k b) What is the VaR at level 5%? 5k On parts (c) and (d), suppose that...
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