Jack and Diane, grew up in the heartland, have now been married for 20 years and would like to invest some money. Assume the risk-free rate is 2% annually. They take a test that rates their individual risk preference. Jack is given a 5 and Diane a 2.(this is A in the equation 5.15 in the book which is E{Geometric average} =E{Arithmetic average} var2

A. Using these risk preferences and the below investment choices find the risk-free equivalent for each of these investments for Jack and Diane.

Expected return Standard Deviation

6% 10%

8% 20%

12% 25%

B. Which investment can the couple agree on, that it is better than the risk free asset?

C. Using the stock that Jack and Diane have chosen in part B of question 1, find the optimal allocation between risky(y) and risk free(1-y) investments for each person, with no shorting. What is the optimal y for Jack?