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High expected return and medium volatility

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Reference no: EM131439174

1. If Francis had an MRS of -3 between clothes and tea and Miguel has an MRS of -5 between clothes and tea (where the MRS is dT /dC = -M UC /M UT ), then

(a) trade is not going to happen because both want more clothes.

(b) Miguel will give up clothes and receive tea.

(c) Francis will give up clothes and receive tea.

(d) trade is not going to happen because both want more tea.

Considering her retirement portfolio choice, Barbara has two options: she can buy stocks with a high expected return and medium volatility (risk) and she can buy commodity futures with a low expected return and high volatility (risk). Barbara should buy commodity futures

(a) under no circumstances.

(b) if they are perfectly positively correlated with stocks.

(c) if they are sufficiently negatively correlated with stocks.

(d) only if she is risk-loving.

4. For a utility function of the type U(W) = Wγ/γ, with γ < 1,

(a) a person's relative risk aversion is always constant.

(b) a person's absolute risk aversion increases in his or her wealth.

(c) a person's relative risk aversion decreases in his or her wealth.

(d) a person's absolute risk aversion is always constant.

Reference no: EM131439174

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