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Your client would like to invest $15,000 in both the risk-free asset with return of rf...

Your client would like to invest $15,000 in both the risk-free asset with return of rf = 1% and the risky portfolio with expected return of μm = 8% and standard deviation of σm = 25%. Her utility function is U(μ,σ)=μ−ασ2, where her risk aversion is 1.5.

a.How much should you invest in the risky portfolio so that she can receive the greatest utility?

b. What is the expected return of this optimal portfolio?
c. What is the standard deviation of the returns of this optimal portfolio?

d. Suppose that your risky portfolio consists of 70% Stock A and 30% Stock B. What are the investment proportions of your client’s overall portfolio in Stock A, B, and risk-free asset?

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago
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