## Assignments

BUSI 521/ECON 505

Asset Pricing Theory/Financial Economics I

- Assignment 1
- Exercise 12.2
- Exercise 12.3

- Assignment 2
- 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.
- Find the optimal threshold for doing something when the reward is \(K-X\).