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The risk free rate is 4%. The optimal risky portfolio has an expected return of 10% and standard deviation of 20%. Answer the following questions.
The risk free rate is 4%. The optimal risky portfolio has an expected return of 10% and standard deviation of 20%. Answer the following questions. Total: 20 marks.
(a) Assume the utility function of an investor is U = E(r) 0.5A^2 . What is condition of A to make the investors prefer the optimal risky portfolio than the risk free asset?
(b) Assume the utility function of an investor is U = E(r)2^2 . What is the expected return and standard deviation of the investors optimal complete portfolio?
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