Assume your utility has the form u er - frac12asigma 2 at, Financial Management

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Assume your utility has the form u er - frac12asigma 2 at

Yahoo today=50 Tomorrow: Good =75 Tomorrow: Bad Price=50

Price Shell today=25 Tomorrow: Good 20 Tomorrow: Bad Price=30

Price Treasury today=100 Tomorrow: Good 105 Tomorrow: Bad Price=105

b. Assume your utility has the form U: E(r) - ½(A)σ 2 ; at what level of risk aversion would be indifferent between holding Yahoo or Treasury notes?

c. Suppose your risk aversion equals 4, you form a portfolio of 30% Yahoo and 70% Treasury notes, is this portfolio optimal?

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Financial Management: Assume your utility has the form u er - frac12asigma 2 at

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