A fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third is a money market fund that provides a safe return of 8%. The characteristics of the risky funds are as follows   Expected Return Standard Deviation Stock Fund 20% 30% Bond Fund 12% 15% The correlation between the fund returns is 0.1 rho 0.1   rf 8%   Suppose you are an investor with the utility function U = ER - 0.5Aσ^2, and your risk aversion is 4. What is your optimal allocation in the stock funds? Suppose you are an investor with the utility function U = ER - 0.5Aσ^2, and your risk aversion is 2. What is your optimal allocation in the stock funds?

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
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A fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third is a money market fund that provides a safe return of 8%. The characteristics of the risky funds are as follows

  Expected Return Standard Deviation
Stock Fund 20% 30%
Bond Fund 12% 15%
The correlation between the fund returns is 0.1
rho 0.1  
rf 8%

 

Suppose you are an investor with the utility function U = ER - 0.5Aσ^2, and your risk aversion is 4. What is your optimal allocation in the stock funds?

Suppose you are an investor with the utility function U = ER - 0.5Aσ^2, and your risk aversion is 2. What is your optimal allocation in the stock funds?

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