Answer:
-85.824% invested in risky asset and 185.824% in risk free asset
Explanation:
Optimal portfolio comprises of risky assets portfolio and risk free assets. Let assume w1 is the weight of risky asset portfolio, therefore the remaining weight will be (1-w1) which would be weight of risk free asset.
Thus; optimal portfolio return equals= w1 x risky asset + (1-w1) x risk free asset.
Optimal portfolio return= risk free asset - w(risky - risk free)
Optimal portfolio return is given as = 0.01218804
risk free return = 0.02
Now: 0.01218804 - 0.02 = -0.0078116.
To amplify utility
Capital allocation between risky and risk free asset is
Weight of risk asset= -0.0078116/3x(0.055088262)^2
= -0.0078116/0.00910
= -0.85824
= -85.824% invested in risky asset
And 1-(-85.824) =185.824% invested in the risk free asset.
Note the following values are taken from the Table attached therewith
