Questions A and B

Question 2 An investment manager has constructed a well-diversified portfolio P. for which the following information is given: Variance = 0.0350 Expected return=0.0665 Further, the risk free rate of retum is 0.02 Investors have the utility function U(F)- E(F)-0.540F) Where A is the risk aversion parameter. The manager will construct a complete portfolio C. by combining portfolio P with the risk free asset. The portfolio C for each of his clients will be tailored based on their risk tolerance. a) Demonstrate how the manager determines the proportions of wealth to be invested in portfolio P and in the risk free asset. (5 marks) b) Determine and interpret the proportions to be invested in the risk free asset and in P for an investor who has a risk aversion parameter of O. Why does this investor behave this way