Assignment:
An investor has an initial wealth WQ that must be allocated between a risk-free asset, with certain return rf, and a risky asset. We assume a simple binomial model of uncertainty, like we did in Section 3.1. The return of the risky asset will either be Ru or Rd, with probabilities pu and pd, respectively.
• Find the optimal allocation of wealth if the investor has an exponential utility function, like Eq. (13.11), with absolute risk aversion a.
• How does the value of the initial wealth influence the result?
Provide complete and step by step solution for the question and show calculations and use formulas.