CAS Exam 9 Spring 2013, Question 1
Study guide: Exam 9
Given the following information about investment options:
U = E(r_c) - 0.5A\sigma_c^2- The risk-free rate of return is 3%.
- The risk premium on the risky portfolio is 5%.
- The reward-to-volatility ratio of the risky portfolio is 0.25.
- The risk aversion parameter is 2.
Part a (0.75 points)
Calculate the certainty equivalent rate of the risky portfolio.
Part b (0.5 points)
Given that 40% of the available assets are invested in the risky portfolio and the rest in the risk-free asset, calculate the expected return and standard deviation of the complete portfolio.
Part c (0.25 points)
Calculate the percentage of available assets to invest in the risky portfolio to maximize utility.
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