Asked by Tempest Hansen on Jun 28, 2024
Verified
Use the below information to answer the following question. Investment Expected Return E(r) Standard Deviation 10.120.1320.150.1530.210.1640.240.21\begin{array}{llcc}\text { Investment } &\text { Expected Return } E(r) &\text { Standard Deviation }\\1&0.12&0.13\\2&0.15&0.15\\3&0.21&0.16\\4&0.24&0.21\\\end{array} Investment 1234 Expected Return E(r) 0.120.150.210.24 Standard Deviation 0.130.150.160.21
U = E(r) ? (A/2) s2, where A = 4.0.
The variable (A) in the utility function represents the
A) investor's return requirement.
B) investor's aversion to risk.
C) certainty-equivalent rate of the portfolio.
D) minimum required utility of the portfolio.
Utility Function
A mathematical representation of how a consumer derives satisfaction from consuming goods or services, showing their preferences.
Aversion to Risk
The inclination to avoid taking risks, preferring safer or more certain outcomes over uncertain ones.
- Understand the concept and calculation of the certainty equivalent rate for comparing investments.
Verified Answer
ZK
Zybrea KnightJul 04, 2024
Final Answer :
B
Explanation :
The variable (A) in the utility function represents the investor's aversion to risk. A higher value of A indicates a higher aversion to risk.
Learning Objectives
- Understand the concept and calculation of the certainty equivalent rate for comparing investments.