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You are constructing a portfolio for an investor with a risk aversion of A=10. You can invest their money in a riskless asset with a return of 0.015, or a risky asset with an expected return of 0.097 and a standard deviation of 0.06. What proportion of their assets should you put in the risky asset? An answer of 0 means none of their assets, an answer of 1 means all of their assets.

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Answer

This is the case of a person who wants to take risk. So, for every 100 dollars of own funds, he will borrow 127.78 dollars, and invest 227 dollars in a risky asset.

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