We have one risk-free asset with a return r, = 0.06 (i.c., 6 %) and one...
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We have one risk-free asset with a return r, = 0.06 (i.c., 6 %) and one risky asset. There are three states of nature. State 1 occurs with a probability of p,=0.25, State 2 occurs with a probability of p=0.50, and State 3 with a probability of p, 0.25. The rate of return in the different states are r=0.00, r=0.12, and r, = 0.20. b) As discussed in class, the expected return of the optimal portfolio, E(r)=r can be written as: r=r, +%, (n-₁). where is the standard deviation in the return of the total portfolio. Assume an investor who has the mean-variance utility function: u = r°.5 – 30r0.5. The investors utility maximization problem is: =r₁ + %, (r, -r₁). Max u=r05-3or5 s.t. r=r What is the expected return there is an interior solution, i.e., r, We have one risk-free asset with a return r, = 0.06 (i.c., 6 %) and one risky asset. There are three states of nature. State 1 occurs with a probability of p,=0.25, State 2 occurs with a probability of p=0.50, and State 3 with a probability of p, 0.25. The rate of return in the different states are r=0.00, r=0.12, and r, = 0.20. b) As discussed in class, the expected return of the optimal portfolio, E(r)=r can be written as: r=r, +%, (n-₁). where is the standard deviation in the return of the total portfolio. Assume an investor who has the mean-variance utility function: u = r°.5 – 30r0.5. The investors utility maximization problem is: =r₁ + %, (r, -r₁). Max u=r05-3or5 s.t. r=r What is the expected return there is an interior solution, i.e., r,
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Answer a The expected return of a portfolio composed of the riskfree asset and the risky asset is gi... View the full answer
Related Book For
Data Analysis and Decision Making
ISBN: 978-0538476126
4th edition
Authors: Christian Albright, Wayne Winston, Christopher Zappe
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