Consider a set of risky assets that has the following expected return and standard deviation: Asset...

Consider a set of risky assets that has the following expected return and standard deviation:

Asset	Expected Return E(r)	Standard Deviation
1	0.12	0.3
2	0.15	0.5
3	0.21	0.16
4	0.24	0.21

If your utility function is as described in the book/lecture with a coefficient of risk aversion of 4.0 , then what is the second-lowest utility you can obtain from an investment in one (and only one) of these assets? Please calculate utility using returns expressed in decimal form (e.g., use .12, not 12 for the expected return of Asset 1). Please enter your answer rounded to the third decimal place

Solutions

Expert Solution

Utility from Asset

1.
=0.12-0.5*4*(0.3)^2=-0.06

2.
=0.15-0.5*4*(0.5)^2=-0.35

3.
=0.21-0.5*4*(0.16)^2=0.1588

4.
=0.24-0.5*4*(0.21)^2=0.1518

Second lowest utility is -0.0600

jeff jeffy answered 1 year ago

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