question archive For an investor who has the following utility function U = expected return of portfolio -0
For an investor who has the following utility function U = expected return of portfolio -0
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For an investor who has the following utility function U = expected return of portfolio -0.5*3*variance of portfolio returns, there is a risky portfolio with an expected return of 0.07 and a variance of 0.78. The risk-free rate is 0.02 and the investor can borrow or lend at this rate for unlimited amount of money. Please determine the final portfolio weight for the optimal risky portfolio for this investor. a. The optimal portfolio weight for this investor is 0.03 O b. The optimal portfolio weight for this investor is 0.06 c. The optimal portfolio weight for this investor is 0.02 O d. The optimal portfolio weight for this investor is 0.02
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Answer:
Optimal portfolio weight = [E(Rp) - Rf] / A(
p^2)
U = E(Rp) - 0.5*A*p^2
From given relation of utility function, A = 3
E(Rp) = 0.07
p^2 = 0.78
Rf = 0.02
Optimal portfolio weight = (0.07 - 0.02) / (3*0.78) = 0.02
Hence, the optimal portfolio weight is 0.02
