1. Portfolio Choice Assume that r₁=.02 E(R)-.18 and market) portfolio. Suppose that an investor's preferences are given by U-E(R)-20 " m where T. denotes the tangency (or where P denotes the investor's portfolio choice which combines proportion W of the market portfolio and proportion 1- W of the risk-free asset. 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.

1. Portfolio Choice Assume that r₁=.02 E(R)-.18 and market) portfolio. Suppose that an investor's preferences are given by U-E(R)-20 " m where T. denotes the tangency (or where P denotes the investor's portfolio choice which combines proportion W of the market portfolio and proportion 1- W of the risk-free asset. 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.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 13QTD

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