Risk free rate is 0.05% How much money should a risk averse investor with $1,000

Question

Risk free rate is 0.05%

How much money should a risk averse investor with $1,000,000 wealth put in each stock and in the risk free rate to maximize his utility, if his risk aversion coefficient is A=2.82? i.e, how much should he invest in the risky asset and how much should he invest in risk free asset (ignore any irrelevant information in the table)

Individual Stock Stock A Stock B Expected Returns Variance SD Covariance 0.92% 0.70% 8.37% 1.20% 10.22% 4.67% 0.001154 Portfolio Weight stock A Weight stock A Expected Returns Portfolio 1.16% SD portfolio 4.50%

Explanation / Answer

Risky asset = (Rp - Rf) / (A*SD2)

   = (1.16% - 0.05%) / (2.82*4.5%2) = 194.38%

Investment in risky asset = 1000000*194.38% = 1943787.76

Invest in stock A = 15%*1943787.76 = 291568.16

Invest in stock B = 85%*1943787.76 = 1652219.60

Borrowing money = 1943787.76 - 1000000 = 943787.76

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.