An investor with risk aversion coefficient α=4 uses modern portfolio theory to describe his preferences over investments. We determine the indifference curve with U-value U(1.05,0.5).
U(1.05,0.5)=1.05−12⋅4⋅0.52=0.55.
Hence, 0.55=μ−12⋅4σ2, which gives μ=0.55+2σ2.
U(1.05,0.5)=1.05−12⋅4⋅0.52=0.55.
Hence, 0.55=μ−12⋅4σ2, which gives μ=0.55+2σ2.