Suppose the risk-free rate of return is 0.03. There are three securities available on the market, their returns
are all normally distributed, and their variance-covariance and returns are given as the Table below:
There are two investors in the economy. Their instantaneous utility functions are given by:
u(r)=1−e−cir, for i=1,2,
where c1 = 2. and c2 = 3
Derive the market portfolio and Sharpe ratio. are they related to the individual investors' preference?
Derive the two individual investors' portfolios. What are the expected return of each individual investor's choice?
Compare the two investors' choice. What does your results suggest? Comment on your observations.
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