Consider a market where there are N rational traders. All of these traders have CARA...
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Finance
Consider a market where there are N rational traders. All of these traders have CARA preferences with risk aversion parameter . They are considering a stock that will pay a terminal dividend in the next period. The expected payoff of the dividend is $100 per share with a standard deviation of $10. Assume that the discount rate is zero. That is, dont worry about discounting future payoffs.
Also, there are M irrational traders. They each will own two shares of the stock no matter what the price.
a) If there are 10 shares of the stock available, solve for the equilibrium price of the stock as a function of , N and M. (You will need this equation for the next part.) Provide the equation and the equilibrium price when = .5, N = 10 and M = 10 (Just the number).
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