Assume that utility functions are of the form: U = E(R) - A2. There are three different types of investors that correspond to the investment options offered by superannuation funds. The Conservative investor has a risk aversion coefficient (A) of 12. The Balanced investor has a risk aversion coefficient of 7 and the High Growth investor has a risk-aversion coefficient of 2. Investors are unable to short-sell the asset classes and are not allowed to borrow or lend at a risk- free rate. They can invest in the Australian Bank Bill Index (CASH), which is a close substitute for the risk-free rate, but it is not a risk-free asset.

Discuss the differences in the asset class weights within each of three investor portfolios as well as the differences between each investor's portfolios. Why do these differences exist? Do these differences make sense?

What is the benefit to each of three investor types from allowing overseas investments? Which investor type benefitted the most? Why?

What are the weights in the minimum variance portfolio? Discuss the differences in the weights for this portfolio. Which investor is most adversely affected by having to hold the minimum variance portfolio compared to their optimal risky portfolio?

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