Question

 

Fill in the table below for the indifference curve that corresponds to a Utility = 0.05 and an investor risk aversions of A=3 and A=4.

Standard deviation	Variance	E (r) (A=3)	E (r) (A=4)
0.0
0.05
0.10
0.15
0.20
0.25

Answer 1

	Solution:
	Standard Deviation	Variance	E r (A=3)	E r (A=4)
	0	0.0000	0.05	0.05
	0.05	0.0025	0.05375	0.055
	0.10	0.0100	0.065	0.07
	0.15	0.0225	0.08375	0.095
	0.20	0.0400	0.11	0.13
	0.25	0.0625	0.14375	0.175
	Variance = Standard deviation square
	0*0	0.0000
	0.05*0.05	0.0025
	0.1*0.1	0.0100
	0.15*0.15	0.0225
	0.2*0.2	0.0400
	0.25*0.25	0.0625
	(A=3)
	E r = 0.5A*Variance + U
	(0.5*3*0)+0.05	0.05
	(0.5*3*0.0025)+0.05	0.05375
	(0.5*3*0.01)+0.05	0.065
	(0.5*3*0.0225)+0.05	0.08375
	(0.5*3*0.0400)+0.05	0.11
	(0.5*3*0.0625)+0.05	0.14375
	(A=4)
	(0.5*4*0)+0.05	0.05
	(0.5*4*0.0025)+0.05	0.055
	(0.5*4*0.01)+0.05	0.07
	(0.5*4*0.0225)+0.05	0.095
	(0.5*4*0.0400)+0.05	0.13
	(0.5*4*0.0625)+0.05	0.175