申論題

1.Suppose that a person with $100,000 to invest believes that stocks will have a real return over the next year of 7 percent. He or she also believes that bonds will have a real return of 2 percent over the next year. This person believes (probably contrary to fact) that the real return on bonds is certain-an investment in bonds will definitely yield 2 percent. For stocks, however, he or she believes that there is a 50 percent chance that stocks will yield 16 percent, but also a 50 percent chance they will yield -2 percent. Hence stocks are viewed as being riskier than bonds.

(b) Assume utility function . Calculate the certainty equivalent yield for stocks. What do you conclude about whether this person will invest $100.000 in stocks or bonds? (6%)