Consider two investors A and B. Investor A’s risk aversion

Consider two investors A and B. Investor A’s risk aversion coefficient λ _A = 4.5, and B’s risk aversion coefficient λB = 3.8. There is one risky asset, whose expected return is 11 percent and the standard deviation is 14 percent. Suppose the risk-free borrowing rate is 4 percent and the risk-free saving rate is 3 percent. The objective of the three investors is to maximize E( _rc )−0.005λ _i σ ² _c , where E( _rc ) and σ ² _c are the expected return and the variance of an investor’s portfolio and i = A, B.

(a) What is investor A’s optimal portfolio weight in the risky asset?

(b) What is investor B’s optimal portfolio weight in the risky asset?