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The optimal risky portfolio offers an expected return of 12.8% and a standard seviation of 13.79%....

The optimal risky portfolio offers an expected return of 12.8% and a standard seviation of 13.79%. Emily has a risk aversion of 7. The risk free rate is 4%. How much should she allocate to risk free asset?

62%

66%

45%

34%

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Answer #1
Expecte Return= 12.80%
Risk Free Return= 4%
Risk Aversion= 7%
Varance= 13.79%x 13.79%
= 1.902%
Optimal Risky Asset (%)= [Portfolio Expected Return { E(rp)} - (rf)] / (Risk aversion x Variance)
= [12.8%-4%]/ ( 7 x 1.902)
= 8.8/13.314
= 0.661
Optimal Risky Asset (%)= 66%
Risk Free Asset (%)= 1- Optimal risk asset
Risk Free Asset (%)= 1-0.66
Risk Free Asset (%)= 0.34
Risk Free Asset (%)= 34%

She should allocate 34 % in risk free asset.

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