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Question 1:
A portfolio has an expected rate of return of 10% and a standard deviation of 29%. The risk-free rate is 3.50%. An investor has the following utility function: U = E(r) - (1/2)A*Variance. Which value of A makes this investor indifferent between the risky portfolio and the risk-free asset?
Question 2:
An investor has the utility function listed in problem 3 and is considering investing in a risky asset with an expected return of 14.25% and a standard deviation of 35% and a Treasury bill with a rate of return of 3.95%. If the investor's coefficient of risk aversion constant A is 2.0, what is their optimal portfolio weight to invest in the risky asset? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.
Question 3:
Using the information from problem 4, the investor decides that the optimal weight to invest in the risky asset y* calculated in problem 4 seems too low, and so the investor decides to invest a higher percent of the complete portfolio, namely 50%, in the risky asset to raise both the risk and the expected return for the complete portfolio. What is the expected return for the non-optimal complete portfolio with this increased level of risk? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.
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