Question: Dora is thinking about investing in a risky asset....
Dora is thinking about investing in a risky asset. She is offered to invest in a mutual fund whose perfomance is tied to the overall economic conditions that are either GOOD or BAD. The likelihood of the good economic condition is70%. After one year, a share of the mutual fund will be worth $107 in the good state and $101 in the bad state of the world. Dora would like to own 1,000 shares of the mutual fund. Suppose that after a year her investment in the mutual fund is only source of wealth, and that everyone in the economy has a log utility funtion u(W)=ln(W),
(a) Calculate the expected value and variance of the year-end wealth as a result of investing the 1,000 shares of this mutual fund.
(b) Calculate the expected utility and centainty equivalent of the investment
(c) The mutual fund's current share price is $105.18. Can this price represent a fair price from Dora's pespective? Draw a graph to support your argumet