Mel and Christy are co-workers with different risk attitudes. Both have investments in the stock market and hold U.S. Treasury securities (which provide the risk free rate of return). Mel's marginal rate of substitution of return for risk where is the individual's portfolio rate of return and σP is the individual's portfolio risk. Christy's Each co-worker's budget constraint is where is the risk-free rate of return, is the stock market rate of return, and is the stock market risk. Solve for each co-worker's optimal portfolio rate of return as a function of , and .

Question

Mel and Christy are co-workers with different risk attitudes. Both have investments in the stock market and hold U.S. Treasury securities (which provide the risk free rate of return). Mel's marginal rate of substitution of return for risk  where  is the individual's portfolio rate of return and σP is the individual's portfolio risk. Christy's  Each co-worker's budget constraint is  where  is the risk-free rate of return,  is the stock market rate of return, and  is the stock market risk. Solve for each co-worker's optimal portfolio rate of return as a function of  ,  and  .

Quizplus · Accepted Answer

The Answer of Mel and Christy are co-workers with different risk attitudes. Both have investments in the stock market and hold U.S. Treasury securities (which provide the risk free rate of return). Mel's marginal rate of substitution of return for risk  where  is the individual's portfolio rate of return and σP is the individual's portfolio risk. Christy's  Each co-worker's budget constraint is  where  is the risk-free rate of return,  is the stock market rate of return, and  is the stock market risk. Solve for each co-worker's optimal portfolio rate of return as a function of  ,  and  .

Mel and Christy Are Co-Workers with Different Risk Attitudes