R4GoodPersonalFinances (version 1.2.0)

calc_optimal_risky_asset_allocation: Calculate optimal risky asset allocation

Description

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
)

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.

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.

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
)

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
)