Donna Is Considering the Option of Becoming a Co-Owner in a Business.Her

question 20

Essay

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 R_j and co-ownership of the business,which has a rate of return of R_b and a level of risk of σ_b.Donna's marginal rate of substitution of return for risk where R_P is Donna's portfolio rate of return and σ_P is 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 R_j, R_b,and σ_b.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

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Definitions:

Democratic-Republic Society

An organization or society that advocates for principles of democracy and republicanism, emphasizing the importance of popular sovereignty and the rule of law.

Hartford Convention

Meeting of New England Federalists on December 15, 1814, to protest theWar of 1812; proposed seven constitutional amendments (limiting embargoes and changingrequirements for officeholding, declaration of war, and admission of new states), but the war endedbefore Congress could respond.

Democratic-Republican Society

The Democratic-Republican Society, active in the late 18th and early 19th centuries, was a political group in the United States that emphasized states' rights and advocated for a strict interpretation of the Constitution.

Freedom of Assembly

The right of individuals to come together and collectively express, promote, pursue, and defend their ideas; a fundamental aspect of democratic societies.