An agent has mean-variance preferences. In particular, his utility for a portfolio with mean return M and Standard deviation V is:
U= M - ((3*V^2)/2))
(M, V) = (.08, .16) and (.02, .05)
correlation coefficient of returns =0
1. Compute approximate optimal weight for a portfolio of these two assets such that the weight sum to one.
2.how would an investor use a "1/n" heuristic to choose portfolio weights in this context?
3. compute the approximate utility loss associated with a "1/n" portfolio relative to the utility of the optimal in part 1.?
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