10. Suppose that there are two assets that are available for investment and an investor has...
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10. Suppose that there are two assets that are available for investment and an investor has the following expected utility: EU = E(R) - 0.5Ao where expected return and standard deviation are expressed in decimals. For example, if expected return is 25%, standard deviation is 15%, and risk aversion is 5, expected utility is computed as: EU = 0.25 0.5x5x0.15 = 0.1938 Now, assume that there is no other instrument (such as the risk-free security) available. Then, derive the analytical expressions for the optimal portfolio weights of the first and the second assets for this specific investor. (Hint: We are not talking about a numerical response here. Rather, you are asked to derive mathematically how you would compute for the optimal portfolio.) 10. Suppose that there are two assets that are available for investment and an investor has the following expected utility: EU = E(R) - 0.5Ao where expected return and standard deviation are expressed in decimals. For example, if expected return is 25%, standard deviation is 15%, and risk aversion is 5, expected utility is computed as: EU = 0.25 0.5x5x0.15 = 0.1938 Now, assume that there is no other instrument (such as the risk-free security) available. Then, derive the analytical expressions for the optimal portfolio weights of the first and the second assets for this specific investor. (Hint: We are not talking about a numerical response here. Rather, you are asked to derive mathematically how you would compute for the optimal portfolio.)
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Related Book For
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba
Posted Date:
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