Problem 2: Risk Aversion and Capital Allocation [10 points] Investment Expected Return Standard Deviation 1 12% 30% 2 15% 50% 3 21% 16% 4 24% 21% Consider an investor having the utility function U = E(r) 0.5 A 2 .

A. [3 points] On a stand-alone basis, which investment would they select if they are risk-averse with A = 4?

B. [3 points] If they are risk-neutral, which investment would they pick?

C. [4 points] If the investor with A=4 allocates their wealth between a risky portfolio P having expected return of 10% and standard deviation of 14% and the risk-free asset which returns 4%, what fraction (y) of their wealth will they allocate to the risky portfolio?