Question
Assume the following utility function for investors. U = 2*r (1/)*r* Where r is rate of return, is standard deviation of returns and is degree
Assume the following utility function for investors.
U = 2*r (1/)*r*
Where r is rate of return, is standard deviation of returns and is degree of risk-aversion coefficient.
a) Assume further that Jakovs degree of risk-aversion coefficient is 20. Which one of the following portfolios would Jakov prefer?
Portfolio | return | Standard deviation |
D | 14 | 8 |
G | 16 | 12 |
b) Assume instead Jakov desires an investment whose rate of return does not fall below 1% with probability of no more than 5%. Which portfolio would he prefer in this case assuming returns are normally distributed?
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