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Unformatted text preview: asset is 1. That is, at the tangent point, . This gives which gives 42 Expected Utility Maximizing Portfolio We will consider the expected utility of CARA utility function under the normality. The expected utility is where We have shown that the maximization of this expected utility is equivalent to the maximization of subject to the linear efficient frontier derived above Substituting this into the objective function, we have which is a function of only. Taking derivative with respect to and setting it to zero, we find the first order condition and the expected utility maximizing value of is The allocation weights are computed from The expected utility maximizing mean and variance of the wealth are 43...
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- Fall '08
- Utility, Probability theory, risky assets, expected utility