Risk-Free versus Risky Assets: Teaching a Portfolio Model With Application to the Stock Market

Abstract

In this paper we present an application where advanced undergraduate students can solve the expected utility portfolio model with a risk-free and a risky asset with both up and down returns in the Stock Market. With real Stock Market data, we use Excel Solver to find the portfolio decision and study how it changes when considering assets with different returns. Finally, we test students’ portfolio decisions and their degree of risk aversion using different utility functions.