Q1.1 Consider the following utility functions, whereWis wealth: a. U(W) = W2

b. U(W) =

c. U(W) = -W

d. U(W) = W

e. U(W) = ln(W)

f.U(W)=with=2

How likely are each of these functions to represent actual investor preferences? Why?

Q1.2 Suppose investors have preference described by the following utility

function withA> 0:

=()

Each investor has to choose between three portfolios with the following characteristics:

()=20%=20%()=12%=22%()=15%=28%

a. Which portfolio would every investor pick and why?

b. What utility would an investor with a risk aversion parameter A=3 get from the three portfolios?

c. What must be the risk aversion of an investor that is indifferent between picking portfolio B and portfolio C?