An investor is indifferent between invest 1million in the risky asset and the risk-free asset. The risky asset has an expected return 14% per year and Standard Deviation of 21% per year. The risk-free lending rate is 7% per year. The risk-free borrowing rate is 11%.
1. What is his risk aversion coefficient?
2. What is the optimal mix of the risky and risk-free asset?
3. When the bank offers the truly risk-free investment opportunity of 7% return per year. Is it worth for invest instead of holding the optimal mix in Question2? Please explain.