Investment Expected Return Standard Deviation

1 20% 38%

2 24% 34%

3 33% 28%

4 34% 27%

Consider an investor having the utility function U = E(r) – 0.5 A σ 2 .

A. On a stand-alone basis, which investment would they select if they are risk-averse with A = 3?

B. If they are risk-neutral, which investment would they pick?

C. If the investor with A=3 allocates their wealth between a risky portfolio P having expected return of 12% and standard deviation of 16% and the risk-free asset which returns 6%, what fraction (y) of their wealth will they allocate to the risky portfolio?