Suppose the world can be described in two states, and two stocks are available with future per share prices: State XY 1 $10 $15 2 $20 $11 The current prices for stock X and Y are $13 and $10, respectively. a) Suppose now you have saved $3900 to invest in stocks (X and Y), what is your investment strategy to maximize your total wealth when the future is in State 1? b) Based on a), what is your investment strategy if you want to keep your future wealth as smooth as possible between the two States?

Suppose the world can be described in two states, and two stocks are available with future per share prices: State XY 1 $10 $15 2 $20 $11 The current prices for stock X and Y are $13 and $10, respectively. a) Suppose now you have saved $3900 to invest in stocks (X and Y), what is your investment strategy to maximize your total wealth when the future is in State 1? b) Based on a), what is your investment strategy if you want to keep your future wealth as smooth as possible between the two States?

Microeconomics: Principles & Policy

14th Edition

ISBN:9781337794992

Author:William J. Baumol, Alan S. Blinder, John L. Solow

Publisher:William J. Baumol, Alan S. Blinder, John L. Solow

Chapter9: The Financial Markets And The Economy: The Tail That Wags The Dog

Section: Chapter Questions

Problem 3DQ

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