Assignments
BUSI 521/ECON 505
Asset Pricing Theory/Financial Economics I

• Assignment 1
  1. Exercise 12.2
  2. Exercise 12.3
• Assignment 2
  1. We saw in class that the optimal threshold for doing something that produces a reward of \(X-K\) is \(\alpha K /(\alpha-1)\), where \(\alpha\) is the positive square root of the quadratic equation \[\frac{1}{2}\sigma^2 \alpha^2 + \left(\mu-\frac{1}{2}\sigma^2\right) \alpha - r = 0\] This implies that the threshold exceeds \(K\) by \(\alpha K /(\alpha-1) - K = K/(\alpha-1)\). Assume \(r=0.05\) and create a table of the values of the factor \(1/(\alpha-1)\) for different values of \(\mu\) and \(\sigma\). Try to provide some intuition for any patterns that you see.
  2. Find the optimal threshold for doing something when the reward is \(K-X\).