2. Suppose that you have a riskfree asset and N risky assets for investment. The rate of return on the riskfree asset is r,, while the (Nx1) vector of the rate of return on the N risky assets is r, which is multivariate normal, i.e., r~ N(μ, E). Your utility function for a portfolio that consists of the riskfree asset and the N risky asset is u(r,)=r, -o Suppose that the sum of investment proportions on the riskfree and risky assets is one. Answer the following question. A. What is your optimal investment proportion in the risky assets? How is your investment on the riskfree asset affected by different values of λ? B. Suppose that there is only one risky asset i. Show the effects of the Sharpe ratio (μ/a) on the investment proportion in the risky asset.

2. Suppose that you have a riskfree asset and N risky assets for investment. The rate of return on the riskfree asset is r,, while the (Nx1) vector of the rate of return on the N risky assets is r, which is multivariate normal, i.e., r~ N(μ, E). Your utility function for a portfolio that consists of the riskfree asset and the N risky asset is u(r,)=r, -o Suppose that the sum of investment proportions on the riskfree and risky assets is one. Answer the following question. A. What is your optimal investment proportion in the risky assets? How is your investment on the riskfree asset affected by different values of λ? B. Suppose that there is only one risky asset i. Show the effects of the Sharpe ratio (μ/a) on the investment proportion in the risky asset.

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter11: Risk-adjusted Expected Rates Of Return And The Dividends Valuation Approach

Section: Chapter Questions

Problem 4QE

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