## AssignmentsBUSI 521/ECON 505Asset 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 $$K-X$$.