Question

John and Mary bring US$100 million to be invested at USB Portal bank. USB’s investment offering includes a risky portfolio P with an expected return of 10% and volatility of 20%. If John's and Mary's degree of risk aversion are 2 and 4. What would be their levels of utility if they fully invest in the risky portfolio P?

a. 0.06 and 0.02

b. 0.02 and 0.06

c. 0.05 and 0.07

d. 0.07 and 0.05

Answer 1

Utility=Expected returns-0.5*risk aversion*standard deviation^2

John's utility=10%-0.5*2*20%*20%=0.060

Mary's utility=10%-0.5*4*20%*20%=0.020

Option A