Question: All questions, if not otherwise specified, are based on the following information. A fund manager is considering three mutual funds. The first is a stock

All questions, if not otherwise specified, are based on the following information. A fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third is a money market fund that provides a safe return of 8%.

The characteristics of the risky funds are as follows

Expected Return Standard Deviation

Stock Fund 20% 30%

Bond Fund 12% 15%

The correlation between the fund returns is 0.1

rho 0.1

rf 8%

Suppose you are an investor with the utility function U = ER - 0.5A^2, and your risk aversion is 4. What is your optimal allocation in the stock funds?

Suppose you are an investor with the utility function U = ER - 0.5A^2, and your risk aversion is 2. What is your optimal allocation in the stock funds?

Suppose you are an investor with the utility function U = ER - 0.5A^2, and your risk aversion is 2. But your borrowing cost is 10 %, rather than the risk-free lending rate 8%. What is your optimal allocation in the stock funds?

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