What fraction x of your money should you invest in risky

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Q. You are considering investing your money. Suppose you have a utility function which depends on expected return r of your invest portfolio and its risk (sigma) i.e. u(r, sigma) = square root (r) - A sigma, where A>0 is a constant. Two assets are available: a risk free asset with return r(subscript)f and a risky asset with return r(subscript)m>r(subscript)f. What fraction x of your money should you invest in risky asset in order to maximize your utility? What happens if A is large? What happens if A is small?

Reference no: EM1369579

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