Question
You are helping a client find the optimal portfolio allocation between risky and risk-free assets. Your client has a coefficient of risk aversion A =
You are helping a client find the optimal portfolio allocation between risky and risk-free assets. Your client has a coefficient of risk aversion A = 3.3 in a standard utility function over portfolio returns U = E(p)-.5*A*Var(p) where E(p) is the expected return of the portfolio and Var(p) is the variance of the portfolio. The risky asset has an expected return of 5% and a standard deviation of 10%. The risk-free asset has an expected return of 2% and a standard deviation of 0%. What percentage of the client's total portfolio should you recommend they invest in the risky asset?
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