Two assets A and B are made to regressed against the return of a market portfolio Rw. The results are as follow:
RA = (0.04 + (0,8RM
Rg= -0.02 +1.8RM
It is given that E(R) = 18% and on = 30%. The capital R means excess return.
(a) (5 points) Under the utility function U(X) = E(rx) – 0.5AoÅ¾, find the range of values of A such that asset A is better than aset B.
(b) (3 points) Form an optimal risky portfolio using only asset A and B. State the proportion of A and B in the portfolio (e) (2 points) Find the total covariance of between the optimal risky portfolio and the market portfolio.