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 R_jand co-ownership of the business, which has a rate of return of R_band a level of risk of σ_b. 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 by
RP = Rj +
σP. Solve for Donna's optimal portfolio rate of return and risk as a function of R_j_,R_b_andσ_b. 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

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 R_jand co-ownership of the business, which has a rate of return of R_band a level of risk of σ_b. Donna's marginal rate of substitution of return for risk
(

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 R<sub>j</sub><sub> </sub>and co-ownership of the business, which has a rate of return of R<sub>b</sub><sub> </sub>and a level of risk of σ<sub>b</sub>. Donna's marginal rate of substitution of return for risk ( / ) is = <sub> </sub>where RP is Donna's portfolio rate of return and σP is her optimal portfolio risk. Donna's budget constraint is given by RP = Rj + σP. Solve for Donna's optimal portfolio rate of return and risk as a function of R<sub>j</sub><sub>, </sub>R<sub>b</sub><sub> and </sub>σ<sub>b</sub>. 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

/

) is

=

where RP is Donna's portfolio rate of return and σP is her optimal portfolio risk. Donna's budget constraint is given by
RP = Rj +

σP. Solve for Donna's optimal portfolio rate of return and risk as a function of R_j_,R_b_andσ_b. 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

Quizplus · Accepted Answer

The Answer of 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 R_jand co-ownership of the business, which has a rate of return of R_band a level of risk of σ_b. 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 by RP = Rj + σP. Solve for Donna's optimal portfolio rate of return and risk as a function of R_j_,R_b_andσ_b. 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

Donna Is Considering the Option of Becoming a Co-Owner in a Business