7.14 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

[U

(W

)] = μW − (A/2)σ2 W

′

where μW is the expected value of wealth and σ2 W is its vari ance. Use this fact to solve for the optimal portfolio allo cation 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.