You want to invest in some combination of corporate debt, the S&P 500, and T-bills. A corporate debt ETF has an expected return of 5% and standard deviation of 10%. The S&P500 ETF has an expected return of 9% and standard deviation of 16%. Corporate debt and the S&P500 have a correlation of 0.5. T-bills have a yield of 2.0% and are considered risk free. You first form an optimal risky portfolio using the corporate debt and S&P500 ETFs. You then allocate your wealth between the optimal risky portfolio and T-bills. Assume that your risk aversion parameter A = 4. 

What fraction of your wealth do you allocate to the optimal risky portfolio?

Answer rating: 100% (QA)

To determine the fraction of your wealth to allocate to the optimal risky portfolio we can use the C... View the full answer