The portfolio problem with a Normally distributed risky asset In Example 7.3 we showed that a person with a CARA utility function who faces a Normally distributed risk will have expected utility of the form E 3U 1W2 4 5 μW 2 1A/22σ2 W, where μW is the expected value of wealth and σ2 W is its variance.

Use this fact to solve for the optimal portfolio allocation for a person with a CARA utility function who must invest k of his or her wealth in a Normally distributed risky asset whose expected return is μr and variance in return is σ2 r (your answer should depend on A). Explain your results intuitively.

Behavioral Problem