long lived riskless asset and short-lived risky asset. The long lived asset is trade-able at both t=0 and t=1. It has a return of R between t=0 and t=1. Between

long lived riskless asset and short-lived risky asset. The long lived asset is trade-able at both t=0 and t=1. It has a return of R between t=0 and t=1. Between t=1 and t=2 this asset has a riskless return of R2, with R1<R2. At t=0, the interest rate prevailing at t=1(i.e R1 or R2) is not two realizations of the period 1 interest rate are equally likely. The short-lived asset is at t=0 and not at t=1. It’s rate of return between t=0 and t=1 is 2R if R1 is realized otherwise all interest rates are gross. -Consider a risk-averse agent with initial wealth W0, suppose the agent has a one period horizon. he cares only about wealth at t=1. is the agents demand for the risky asset? -Consider an agent with initial wealth at W0,who maximizes the utility function E0[W21-Y/1-Y] Where W2 denotes wealth at t=2. Determine the agents demand for the risky asset(expressed as a fraction of initial wealth). Explain why the agent would demand a risky asset.

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