Microeconomics

5. Your best friend from high-school, Erlich, is contemplating dividing his portfolio between two assets, shares of BLESSLA (a transportation company that makes vehicles without front grills) which have an expected return of 30% and a standard deviation of 90%, and a safe asset, government debt, that has an expected return of 2% and a standard deviation of 0%. a. [2] If Erlich invests X percent of his wealth in the risky asset, what will his expected return be? What will the standard deviation be? b. [2] Solve for Erlich's "budget constraint"- i.e. the expected return on his wealth as a function of the standard deviation (Hint: Combine the two quantities from part(a).) c. [2] Erlich's utility function is u(rx, Ox) = min(ry, 0.2 - 0.050,). What are his optimal values of rx and Ox? (Hint: Set this up as two equations in two unknowns, one of the equations is the "budget constraint."). d. [2] What fraction of his wealth should Erlich invest in the safe asset