Consider three investors with significantly different risk profiles. Let us assume that all three investors have total wealth of $1 million. The optimal weight (y*) in the tangency portfolio is 0.10 for the super conservative investor (Alex), 0.50 for the conservative investor (Roberto), and 0.90 for the moderate-risk investor (Cathy).

1, Calculate the dollar investment in each asset class for each of the three investors.

2, Is the composition of the risky portfolio the same for all three investors? If so, explain why, and

discuss the role of risk aversion in the allocation decision?

3, Estimate the average risk profile of your group. What should be the optimal allocation for your

team? (Note: Theory suggests that the investor with moderate risk tolerance has a y* close to 1.)