Suppose that one of five states of nature may unfold tomorrow. All are equally likely....
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- Suppose that one of five states of nature may unfold tomorrow. All are equally likely. Consider two risky assets with uncertain returns rA and rB as follows:
| State | w1 | w2 | w3 | w4 | w5 |
| R_A | 0.5 | 0.5 | 0.7 | 0.7 | 0.7 |
| R_B | 0.9 | 0.8 | 0.4 | 0.3 | 0.7 |
(a) Explain which asset a risk averse investor will choose. (b) Does either asset state-by-state dominate, FOSD or SOSD the other? Provide evidence. (c) Does a riskless portfolio exist? If so, what is it?
Course: Financial Economics
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