You are on page 1of 2

48304584.

xls

Mossin - Example
Data (see Mossin p. 49) Rescaled data
State of the world (to calculate covariances)
Firms s=1 s=2 s=3 s=1 s=2 s=3
X1 0 1 1 0.00 0.50 0.50
X2 1 1 2 0.71 0.50 1.00
Proba 0.5 0.25 0.25

Demand for securities (prices are g (p.52)


p1 0.3
p2 1.1
RF 1.0
Initial wealth
W 500
Quadratic utility function u(Y) = Y-cY²
1/2c 1090 => c = 0.000459
Statistics
E(X) E(X)-RFxp Variance-covariance
0.5 0.2 0.25 0.125
1.25 0.15 0.125 0.1875
Sum 1.75
Optimal number of shares:
The optimal number of shares is the solution of the equations
0.29 0.155 Z1 = 118
0.155 0.21 Z2 = 88.5
The optimal number of shares is:
Z1 300.00
Z2 200.00
Composition of the reference portfolio Zj=(1/2c-RF*W)*Z*j
The composition of the reference portfolio is independ of c and W
Z*1 0.508
Z*2 0.339
Market equilibrium (p.73)
c 1/2c
Investor 1 0.20 2.5
Investor 2 0.17 3
Sum 5.5

b bj=Sk(sjk)
Firm 1 0.375
Firm 2 0.313
Sum 0.688
l 0.267 Market risk aversion

Price E(R) State 1 State 2 State 3


Firm 1 $0.40 25.0% -100.0% 150.0% 150.0%
Firm 2 $1.17 7.1% -14.3% -14.3% 71.4%
Market $1.57 11.7% -36.2% 27.7% 91.5%

Endowment Zij
Firm 1 Firm 2 Wealth
Investor 1 1.000 0.000 $0.40
Investor 2 0.000 1.000 $1.17
$1.57
Equilibrium zi1 zi2 Risk-free
Investor 1 0.5339 0.5339 -$0.44
Investor 2 0.4661 0.4661 $0.44

$ Risk-free Wealth
Investor 1 $0.21 $0.62 $0.84 -$0.44 $0.40
25.5% 74.5%
Investor 2 $0.19 $0.54 $0.73 $0.44 $1.17
25.5% 74.5%
Market $0.40 $1.17 $1.57
25.5% 74.5%

CAPM E(R) = RF + (RM - RF)* Beta Alpha


Firm 1 25.0% 0.0% 11.7% Err:511 Err:511
48304584.xls

Firm 2 7.1% 0.0% 11.7% Err:511 Err:511

You might also like