Question: An investors utility function is given by: = [] 0.5 . There are two assets available in the market, with expected returns and standard deviations

An investors utility function is given by: = [] 0.5 . There are two assets available in the market, with expected returns and standard deviations of [1] = 20%, 1= 11

25%,[2] = 5%,2= 0%.

(a) Suppose that the investor allocates 1 = 50% of his wealth to asset 1 and the rest in asset 2, what is the value the investors risk aversion coefficient A?

(b) Now there is a new risky asset with expected return and standard deviation of [3] = 15%, 3= 30%. Its correlation with asset 1 is 0.5. What is the optimal risky portfolio?

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