Question: An investors utility function is given by: = [] 1 /2 2 . There are two assets available in the market, with expected returns and

An investors utility function is given by: = [] 1 /2². There are two assets available in the market, with expected returns and standard deviations of [₁] = 20%, ₁ = 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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