Question
In: Finance
Stocks have outperformed T-Bills by about 7% per year over the past 95+ years. Use utility...
Stocks have outperformed T-Bills by about 7% per year over the past 95+ years. Use utility theory to explain why an investor might want to investment in T-Bills. (15 pts)
Solutions
Expert Solution
Answer-
The Utility theory states that the behavior of individuals is based on the premise an individual or individuals can consistently rank order their choices depending upon their preferences. This theory is a positive theory that seeks to explain the individuals observed behavior and choices that are commonly followed.
The individual still might prefer investing in T- Bills over the stocks that have traditionally given 7 % higher returns over the period of 95 + years because the reurns in the T-bills are guaranteed as they rae backed by the US government, whereas the stock returns are very volatile and give negative returns during economic downturns caused by events like disasters or pandemics and recessions.
The preferences of the individuals varies and are mostly risk averse and the choices are based on the current economic and market conditions.The individuals prefer returns that are nominal but are guaranteed and backed by US Government. The preferential bahavior of individuals that are inclined based on the overall population of investors who commonly follow what all individuals follow.
jeff jeffy answered 1 year agoRelated Solutions
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