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MCS,PHD
Argosy University/ Phoniex University/
Nov-2005 - Oct-2011
Professor
Phoniex University
Oct-2001 - Nov-2016
Suppose that the world can be described using two states and two stocks Y and Z are available. We assume the stocks’ future prices have the following distributions:
|
State |
Future Prices Stock Y |
Future Prices Stock Z |
|
1 |
$10 |
$15 |
|
2 |
$20 |
$11 |
The initial prices for the stocks are: Y(1) = $13, Z(1) = $10. Our utility function in (w1, w2) space is U w1, w(2) = w1 × w2, where U represents the utility level. Now we have an initial endowment of $420. How many shares and what positions of Y and Z should we choose to build our portfolio so that we actually maximize our utility function? (Assume fractional shares are permitted.)
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