The risk free rate is 3%. The optimal risky portfolio has an expected return of 9% and standard deviation of 20%. (a) Assume the utility function of an investor is U = E(r) − 0.5Aσ2. What is condition of A to make the investors prefer the optimal risky portfolio than the risk free asset? (b) Assume the utility function of an investor is U = E(r) − 2.5σ2. What is the expected return and standard deviation of the investor’s optimal complete portfolio?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
The risk free rate is 3%. The optimal risky portfolio has an expected return of 9% and standard
deviation of 20%.
(a) Assume the utility function of an investor is U = E(r) − 0.5Aσ2. What is condition of
A to make the investors prefer the optimal risky portfolio than the risk free asset?
(b) Assume the utility function of an investor is U = E(r) − 2.5σ2. What is the expected
return and standard deviation of the investor’s optimal complete portfolio?
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can you hand write it instead of using excel
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