Suppose that there is one risk free asset with return r _f and one risky asset with normally distributed return ∼ N (μ, σ ² ). Show that the CARA utility u(r) = -e-Ar gives the same optimal allocation of wealth to the risky asset as the mean-variance utility function we used in class. That is, show that

α* _CARA = E[r] - r _f / Aσ ²

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Hence rf i... View the full answer