You manage a mutual fund with 17% expected return and 27% volatility. The risk-free rate is 7%. Assume a new clients utility function is U = E(r) 1 2A2 .

a. What is his optimal allocation y, if his risk aversion, A, is 2, 5, or 10? How does the optimal allocation change with A? Explain the intuition.

b. What happens to his optimal allocation if the expected return on your fund goes up to 20% (for A = 2 only; other assumptions stay the same)? Explain the intuition for the change.

c. What happens to his optimal allocation if the T-bill rate drops to 5% (for A = 2 only; other assumptions stay the same)? Explain the intuition for the change.

d.What happens to his optimal allocation if the return standard deviation of your fund goes up to 35% (for A = 2 only; other assumptions stay the same)? Explain the intuition for the change