Your best friend from high-school, Erlich, is contemplating dividing his portfolio between two assets, shares of BLESSLA (a transportation company that makes vehicles without front grills) which have an expected return of 30% and a standard deviation of 90%, and a safe asset, government debt, that has an expected return of 2% and a standard deviation of 0%.

a. [2] If Erlich invests percent of his wealth in the risky asset, what will his expected return be? What will the standard deviation be?

b. [2] Solve for Erlich's "budget constraint" i.e. the expected return on his wealth as a function of the standard deviation (Hint: Combine the two quantities from part(a).)

c. [2] Erlich's utility function is (, ) = (, 0.2 0.05 ). What are his optimal values of and ? (Hint: Set this up as two equations in two unknowns, one of the equations is the "budget constraint.").

d. [2] What fraction of his wealth should Erlich invest in the safe asset?