The Optimal Proportion of the Risky Asset in the Complete

question 54

Essay

The optimal proportion of the risky asset in the complete portfolio is given by the equation y* = [E(r_P)- r_f]/(.01A*Variance of P).For each of the variables on the right side of the equation,discuss the impact the variable's effect on y* and why the nature of the relationship makes sense intuitively.Assume the investor is risk averse.

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Definitions:

Visual System

The part of the central nervous system which enables individuals to process visual detail, it includes the eye, retina, optic nerves, and brain visual cortex.

Depth Perception

The ability to perceive the visual world in three dimensions and to judge the distance of objects accurately.

Three Dimensions

The state or quality of having three measurements: length, width, and depth, used to describe the physical world and represented in geometry, design, and spatial understanding.

Figure-Ground Relationship

The principle by which we organize the perceptual field into stimuli that stand out (figure) and those that are left over (ground).