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

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 ago

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