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33:136:405 Risk Modeling

Assignment 5 (due March 28)

Problem

Consider the portfolio optimization problem based on expected utility maxi- mization:

20

| 1

(a) Use the data provided on the first sheet of the Excel file "HW5-data" to solve the problem using exponential, logarithmic, and another utility function of your choice. For the exponential and logarithmic utility, use the following formulae:

α 1 {x} | −é −300x y α2 {x} | ln{1 | 200x}●

Assume that the scenarios are equally likely.

(b) Use the data on the second sheet to evaluate the performance of the portfolios from (a). Calculate the three cumulative distribution functions of the return rate of your portfolios from (a) and plot them together to compare.