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 and co-ownership of the business, which has a rate of return of and a level of risk of . Donna's marginal rate of substitution of return for risk where is Donna's portfolio rate of return and σ_Pis her optimal portfolio risk. Donna's budget constraint is given by Solve for Donna's optimal portfolio rate of return and risk as a function of , and . 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

and co-ownership of the business, which has a rate of return of

and a level of risk of

. Donna's marginal rate of substitution of return for risk

where

is Donna's portfolio rate of return and σ_Pis her optimal portfolio risk. Donna's budget constraint is given by

Solve for Donna's optimal portfolio rate of return and risk as a function of

,

and

. 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 and co-ownership of the business, which has a rate of return of and a level of risk of . Donna's marginal rate of substitution of return for risk where is Donna's portfolio rate of return and σ_Pis her optimal portfolio risk. Donna's budget constraint is given by Solve for Donna's optimal portfolio rate of return and risk as a function of , and . 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