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5. The risk free rate is 4%. The optimal risky portfolio has an expected return of 10% and standard deviation of 20%. Answer the following
5. The risk free rate is 4%. The optimal risky portfolio has an expected return of 10% and standard deviation of 20%. Answer the following questions. Total: 20 marks. (a) Assume the utility function of an investor is U=E(r)0.5A2. What is condition of A to make the investors prefer the optimal risky portfolio than the risk free asset? (10 marks) (b) Assume the utility function of an investor is U=E(r)22. What is the expected return and standard deviation of the investor's optimal complete portfolio? (10 marks)
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