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Consider an investor with preferences given by the utility function U = E(r) – 0.5Aσ2 and there are two portfolios with the following characteristics: Portfolio A Portfolio B E(r) = 0.06 E(r) = 0.10 σ = 0.07 σ = 0.17 (a) suppose that the investor has a level of risk aversion of A = 4. Which portfolio should the investor choose? (b) Suppose that the investor has a level of risk aversion of A = 2. Which portfolio should the investor choose? Briefly explain why your answer is different from Part (a). (c) Suppose the investor has a level of risk aversion of A = 4. What must the return be on a risk-free asset in order for the investor to be indifferent between investing in the risk-free asset and Portfolio B? (d) Suppose the investor has a level of risk aversion of A = 4. Calculate the risk-premium associated with Portfolio B. Assume that the risk-free rate is the same as your answer in Part(c).
u.s. supreme court justice stephen breyers book breaking the vicious circle toward effective risk regulation 1993
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