One of our clients, Mr. Choi, currently has an investment portfolio value of $1mil. His portfolio consists of 70% risky portfolio and 30% risk-free asset.If Mr. Choi has now extra $100,000 cash to invest, and if he is a constantrelative risk aversion, how do you think he wants to allocate his extra $100,000 over the risky and the risk-free asset?Assume that Mr. Choi’s utility is a power function with gamma= 2 If another client, Mr. Smith, also has a power utility function but has a larger risk preference parameter value of gamma than Mr. Choi does, how does Mr. Smith want his money to be allocated relative to Mr. Choi?

1 1 Million Portfolio 70% risk 30%…

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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One of our clients, Mr. Choi, currently has an investment portfolio value of $1mil. His portfolio consists of 70% risky portfolio and 30% risk-free asset.

If Mr. Choi has now extra $100,000 cash to invest, and if he is a constant

relative risk aversion, how do you think he wants to allocate his extra $100,000 over the risky and the risk-free asset?
Assume that Mr. Choi’s utility is a power function with gamma= 2 If another client, Mr. Smith, also has a power utility function but has a larger risk preference parameter value of gamma than Mr. Choi does, how does Mr. Smith want his money to be allocated relative to Mr. Choi?

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