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Question
Donna is considering the option of becoming a co-owner in a business. Her investment choices are to hold a risk free asset that has a return of Rjand co-ownership of the business, which has a rate of return of Rband a level of risk of σb. Donna's marginal rate of substitution of return for risk(
/ 
) is 
= 
where RP is Donna's portfolio rate of return and σP is her optimal portfolio risk. Donna's budget constraint is given byRP = Rj +
σP. Solve for Donna's optimal portfolio rate of return and risk as a function of Rj, Rband σb. Suppose the table below lists the relevant rates of returns and risks. Use this table to determine Donna's optimal rate or return and risk.| Investment | Rate of Return | Risk |
| Risk Free | 0.06 | 0 |
| Business | 0.25 | 0.39 |
Answer
This answer is hidden. It contains 466 characters.
Related questions
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