Question
Alicia wants to divide her budget between two investments, A and B, with respective expected returns r A and r B and risks A and
Alicia wants to divide her budget between two investments, A and B, with respective expected returns rA and rB and risks A and B. Assume rA < rB and A < B. The correlation between the investment returns is .
a. Explain, using equations and a graph, how she should decide how to allocate her budget between the two investments given her utility function U(r,), where r is expected portfolio return and is portfolio risk.
b. Now suppose U(r,) = r - 2 /2. Calculate what fraction of her budget she should invest in A.
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Microeconomics Principles, Problems and Policies
Authors: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn
20th edition
978-0077660819, 77660811, 978-1259450242
