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Your degree of risk aversion (A) is 2.9. The risky asset's expected return is 14.1%, while...

Your degree of risk aversion (A) is 2.9. The risky asset's expected return is 14.1%, while the risk-free rate is 1.6%. The risky asset has a volatility of 23%. You have $7,000 to invest. How much (in $) should you invest in the risky portfolio if you want to respect your degree of risk aversion?

Hint: First find the % you should invest, then use the % to find the amount of money. (3 decimal places)

Solutions

Expert Solution

The volatility is assumed to be the standard deviation from the market of the risky asset, i.e volatility = sd= .

Risk Aversion(A) is defined as

If the investor had an actual risk aversion coefficient of 4.121 then he/she would have invested the full $7000, but as it has an actual risk aversion of 2.9 , the investor wll invest

The investor invests $ 4926

jeff jeffy answered 2 years ago
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