Consider a risk averse investor, Investor C, with a utility function given by u C = p 1 2 (r) 2 , where p is the expected payoff from potential investments, and r is the level of risk. The risk-return schedule is given as p = er d(r) 2 where e and d are constants such that e > 0 and d > 0

1. Solve for Investor C's utility maximising expected payoff. [4 marks]

2. Now assume Investor C receives an inheritance large enough to make him risk neutral. Solve for the risk neutral Investor C's utility maximising expected payoff.