INV 1 5aii Suppose that you have the following utility function: U=E(r) – ½ Aσ 2 and A=3 Suppose that you have $10 million to invest for one year and you want to invest that money into ETFs tracking...

INV 1 5aii

Suppose that you have the following utility function:

U=E(r) – ½ Aσ²   and A=3

Suppose that you have $10 million to invest for one year and you want to invest that money into ETFs tracking the S&P 500 (US) and S&P/TSX 60 (Canada) index, which are often used as proxies for the US and Canadian stock markets, respectively, and the Canadian one-year T-bill. Assume that the interest rate of the one-year T-bill is 0.35% per annum.

You have found two ETFs that you are interested in. From a set of their historical data between 2001 and 2019, you have estimated the annual expected returns, standard deviations, and covariance as follows:

ETFUS :

E(r)= 0.070584

standard deviation =   0.173687

ETFCDA  :

E(r)= 0.073763

standard deviation =  0.16816

 Covariance between ETFUS and ETFCDA = 0.02397

What is the portfolio expected return for ETFCDA?