2. Portfolio Choice m Assume that r, = .04, E(R) = .12, and o= .25 where m denotes the tangency (or market) portfolio. Suppose that an investor's preferences are given by U = E(R₂) - 0² where p denotes the investor's portfolio choice which combines proportion market portfolio and proportion 1- w of the risk-free asset. A. Is this investor risk loving or risk averse? Please explain your reasoning. of the B. If the investor wants to maximize utility by allocating her wealth between the market portfolio and the risk-free asset, what proportion of wealth should she hold in the risk- free asset (1-w)? What is the risk and expected return of this utility-maximizing portfolio? Please explain your answers and illustrate graphically, being careful to label all axes.
2. Portfolio Choice m Assume that r, = .04, E(R) = .12, and o= .25 where m denotes the tangency (or market) portfolio. Suppose that an investor's preferences are given by U = E(R₂) - 0² where p denotes the investor's portfolio choice which combines proportion market portfolio and proportion 1- w of the risk-free asset. A. Is this investor risk loving or risk averse? Please explain your reasoning. of the B. If the investor wants to maximize utility by allocating her wealth between the market portfolio and the risk-free asset, what proportion of wealth should she hold in the risk- free asset (1-w)? What is the risk and expected return of this utility-maximizing portfolio? Please explain your answers and illustrate graphically, being careful to label all axes.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Please advise
![2. Portfolio Choice
Assume that r, = .04, E(R„)=.12, and o, = .25 where m denotes the tangency (or
market) portfolio. Suppose that an investor's preferences are given by
U = E(R,)-o,
where p denotes the investor's portfolio choice which combines proportion
market portfolio and proportion 1-w of the risk-free asset.
of the
A. Is this investor risk loving or risk averse? Please explain your reasoning.
B. If the investor wants to maximize utility by allocating her wealth between the market
portfolio and the risk-free asset, what proportion of wealth should she hold in the risk-
free asset (1- w)? What is the risk and expected return of this utility-maximizing
portfolio? Please explain your answers and illustrate graphically, being careful to label
all axes.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fcece73c3-9a2b-4e21-a491-af4234c6d1da%2F9987f1ab-1757-44a1-9092-80b8eedbe8c3%2Fmevzgac_processed.png&w=3840&q=75)
Transcribed Image Text:2. Portfolio Choice
Assume that r, = .04, E(R„)=.12, and o, = .25 where m denotes the tangency (or
market) portfolio. Suppose that an investor's preferences are given by
U = E(R,)-o,
where p denotes the investor's portfolio choice which combines proportion
market portfolio and proportion 1-w of the risk-free asset.
of the
A. Is this investor risk loving or risk averse? Please explain your reasoning.
B. If the investor wants to maximize utility by allocating her wealth between the market
portfolio and the risk-free asset, what proportion of wealth should she hold in the risk-
free asset (1- w)? What is the risk and expected return of this utility-maximizing
portfolio? Please explain your answers and illustrate graphically, being careful to label
all axes.
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