Question

A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15. The risk-free rate is 6%. An investor has the following utility function: U = E(r) - (A/2)s 2 . Which value of A makes this investor indifferent between the risky portfolio and the risk-free asset?

How would I complete this on a scientific calculator? For example, you cannot put algebra into a scientific calculator. So I'll need to do it manually, is it possible to adjust the formula so I can be completed in one equation on a scientific calculator?

Answer 1

There is no way to do it in one line.

A=(expected return on risky portfolio-expected return on risk free asset)/(0.5*standard deviation of risky portfolio^2)=(0.15-0.06)/(0.5*0.15*0.15)

You can do some small calculations yourself

Above becomes

=0.09/(0.5*0.15*0.15)
=0.6/(0.5*0.15)
=4/0.5
=8