Question

Your degree of risk aversion (A) is 4.1. The risky asset's expected return is 14.3%, while the risk-free rate is 2.5%. The risky asset has a volatility of 17%. You have $8,000 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.

{Enter your answer in dollars with 2 decimals, but do not use the "$".}

Answer 1

% to be invested in risky portfolio = (Expected portfolio return - risk-free rate)/(degree of risk aversion*risky asset volatility²)

% to be invested in risky portfolio = (0.143 - 0.025)/(4.1*0.17²) = 0.118/(4.1*0.0289) = 0.118/0.11849 = 0.9958646299265761 or 99.58646299265761%

amount to be invested in risky portfolio = $8,000*99.58646299265761% = $7,966.92

you should invest $7,966.92 in the risky portfolio if you want to respect your degree of risk aversion.