Consider a risky portfolio that offers a rate of return of 15% per year with a standard deviation of 20% per year. Suppose an investor is indifferent between investing in the risky portfolio and investing in a risk free asset earning 8% per year.
a) What is the investor's risk aversion coefficient?
b) If allowed to invest in a combination of the risky portfolio and the risk free asset, what proportion would the investor hold in the risky portfolio?
c) What is the expected rate of return and the standard deviation of the rate of return on the optimally chosen combination?
d) What would be the investor's certainty equivalent return for the optimally chosen combination?