CAS Exam 9 Spring 2017, Question 22
Study guide: Exam 9
An investor allocates a portfolio between an insurance company and risk-free assets. Given the following information:
| Expected Value | Standard Deviation | |
|---|---|---|
| U / R | 2% | 10% |
| I / A | 4% | 4% |
- Reserves are 150.
- Surplus is 100.
- Surplus is equal to Shareholders' Equity.
- The risk-free rate is 3%.
- I / A is independent from U / R.
- I, A, U and R are defined as in Ferrari's "The Relationship of Underwriting Investment, Leverage, and Exposure to Total Return on Owner's Equity."
- The investor assigns utility to the portfolio by the function
Utility = E(r) - 3\sigma^2.
Determine the weight this investor would assign to the insurance company in the optimal complete portfolio.
Part a (1.75 points)
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution