Question
In: Finance
Assume that you manage a risky portfolio with expected rate of return of 18% and standard...
- Assume that you manage a risky portfolio with expected rate of return of 18% and standard deviation of 28%. The T-bill rate is 8%.
a) Calculate the optimal allocation to risky portfolio and determine the utility score for this portfolio (assume A=3) [2]
Solutions
Expert Solution
a)
Optimal allocation formula = E[rp] - Rf /( A*standard deviation^2)
E[rp] = Expected return on portfolio
Rf = risk free rate
A =3
Optimal allocation to risky portfolio = (18% - 8%) / (3*28^2)
= 0.4252 or 42.52%
Utility Value:
Utility value = E(r) - (1/2)*A*(Standard Deviation^2)
= 18% - (1/2)*3*(0.28^2)
= 0.0624
jeff jeffy answered 2 years agoRelated Solutions
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