Suppose you can invest in fund R&R (named after Risk and Return), which manages a portfolio with an expected return of 15% and a standard deviation of 20%. At the same time, the T-bill rate is 8%.

Answer questions (a) and (b) and show the calculations that support your answers.

(a) For an investor whose complete portfolio consists of 70% R&R and 30% T-bills, what is the implied risk aversion of this investor?

(b)For an investor with a risk aversion of 5 and allocates her investment budget between R&R and T-bills, what is the proportion (y) that she would allocate to R&R that generates the highest expected return while satisfying her risk tolerance?