Imagine you own a financial firm that manages asset portfolios. All you care about as you manage your business is expected returns, and any asset you sell is characterized by (p, bR, bE) where p is how much you charge for 1 unit of the asset, bR is how much the asset will pay customers (as, say, dividends) during recessions and bE is how much the asset will pay customers during expansions. A recession happens with probability δ ∈ (0, 1) and an expansion happens with probability 1 − δ.
(a) If you only care about expected returns, are you risk averse, risk seeking, or risk neutral?
(b) Suppose the assets you sell have the feature that those who buy them experience no change in their expected consumption levels as a result of buying the assets. Derive an equation that expresses the price p of your assets in terms of δ, bR, and bE.