The risk-free asset has a return of 1.62%. The risky asset has a return of 8.82%...

The risk-free asset has a return of 1.62%. The risky asset has a return of 8.82% and has a variance of 8.82%. Karen has the following utility function: LaTeX: U=a\times\sqrt{r_{c\:}}-b\times\sigma_cU = a × r c − b × σ c, with a=1.3 and b=8.78. LaTeX: r_cr c and LaTeX: \sigma_cσ c denote the return and the risk of the combined portfolio. The optimal amount to be invested in the risky portfolio is 33.85% . (Note: this solution does not necessarily correspond to the ACTUAL optimal solution, but assume it is to answer this question). Compute Karen's utility when she invests optimally

Expert Solution

Compute Karen's utility when she invests optimally

=1.3*(33.85%*8.82%+(1-33.85%)*1.62%)-8.78*(33.85%*sqrt(8.82%))
=-0.8299

jeff jeffy answered 2 years ago

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