Calculate optimal risky asset allocation

Calculates the optimal allocation to the risky asset using the Merton Share formula.

Usage

calc_optimal_risky_asset_allocation(
  risky_asset_return_mean,
  risky_asset_return_sd,
  safe_asset_return,
  risk_aversion
)

Arguments

risky_asset_return_mean

A numeric. The expected (average) yearly return of the risky asset.

risky_asset_return_sd

A numeric. The standard deviation of the yearly returns of the risky asset.

safe_asset_return

A numeric. The expected yearly return of the safe asset.

risk_aversion

A numeric. The risk aversion coefficient.

Value

A numeric. The optimal allocation to the risky asset. In case of NaN() (because of division by zero) the optimal allocation to the risky asset is set to 0.

Details

Can be used to calculate the optimal allocation to the risky asset for vectors of inputs.

See also

• How to Determine Our Optimal Asset Allocation?

• Haghani V., White J. (2023) "The Missing Billionaires: A Guide to Better Financial Decisions." ISBN:978-1-119-74791-8.

Examples

calc_optimal_risky_asset_allocation(
  risky_asset_return_mean = 0.05,
  risky_asset_return_sd   = 0.15,
  safe_asset_return       = 0.02,
  risk_aversion           = 2
)
#> [1] 0.6666667

calc_optimal_risky_asset_allocation(
  risky_asset_return_mean = c(0.05, 0.06),
  risky_asset_return_sd   = c(0.15, 0.16),
  safe_asset_return       = 0.02,
  risk_aversion           = 2
)
#> [1] 0.6666667 0.7812500