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Unformatted text preview: – slope c p f p f c r r E r r E σ ] ) ( [ ) (+ = Higher borrowing rate • Normally the borrowing rate is higher, eg 9%, Risk aversion and allocation • Choosing optimal portfolio • Greater levels of risk aversion lead to larger proportions of the risk free rate. • Lower levels of risk aversion lead to larger proportions of the portfolio of risky assets. Utility function • U = E ( r )  .005 A σ 2 Where U = utility E ( r ) = expected return on the asset or portfolio A = coefficient of risk aversion σ 2 = variance of returns Optimal portfolio • Expected return: • Variance: • Optimal portfolio Optimal portfolio • • • • Example • 2 * 01 . ) ( p f p A r r E y σ=...
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This note was uploaded on 07/12/2011 for the course FINA 221 taught by Professor Na during the Spring '09 term at HKUST.
 Spring '09
 na

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