Suppose the representative investor has the following utility function U = E(r) 1 2A2, where E(r) is the mean of return, A is the risk aversion, and 2 is the variance of returns. Suppose you have three types of portfolios: a low risk portfolio with E(r) = 0.07 and = 0.05 b medium risk portfolio with E(r) = 0.09 and = 0.10 c and high risk portfolio with E(r) = 0.13 and = 0.20 1 Which portfolio will be chosen by the agent with A = 2.0; A = 3.5; A = 5.0

2 Which of the above portfolios will risk-lover choose? Assume some risk aversion for the risk-lover investor.

3 Which portfolio will be chosen by a risk-neutral investor? Justify your argument