#7. This carries a maximum score of three points. Assume an investor with the following utility function:...
Question:
#7. This carries a maximum score of three points.
Assume an investor with the following utility function: U = E(r) - 1/2(s2).
Calculate her expected utility for the below two possible investment choices.
[2 points]
All-stock portfolio: Expected return = 14% and Standard Deviation (s) = 18%
Bond Portfolio: Expected return = 9% and Standard Deviation (s) = 11%
A research analyst suggests that the above Bond Portfolio can be expanded to add some new types of bonds which will increase the expected return to 11%. The investor is willing to invest in this new combined portfolio as long as the utility of the combined portfolio is at least 10%. What is the maximum volatility this new consolidated bond portfolio can have for this to be feasible? [1 point]
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill