There are three risky assets described in the table below: Asset Expected Return 1 2 5% 7% 6.5% There are three investors X, Y, and Z whose preferences are represented by the utility function U = E(r) - 0.5A02, where A is the risk-aversion coefficient. Among the three investors, Investor X is the least risk-averse, while investor Z is the most risk-averse. The risk-free rate is 2%. If they intend to form a complete portfolio of the risk-free asset and one of the three risky assets, which risky portfolio will be picked by investors X, Y, and Z respectively? 3 O a. X:Asset 2; Y: Asset 2; Z: Asset 2 O b. X:Asset 1; Y: Asset 1; Z: Asset 1 X: Asset 3; Y: Asset 3; Z: Asset 3 There is no sufficient information to tell Standard deviation O c. Od. O e. X: Asset 3; Y: Asset 2; Z: Asset 1 10% 20% 30%

There are three risky assets described in the table below: Asset Expected Return 1 2 5% 7% 6.5% There are three investors X, Y, and Z whose preferences are represented by the utility function U = E(r) - 0.5A02, where A is the risk-aversion coefficient. Among the three investors, Investor X is the least risk-averse, while investor Z is the most risk-averse. The risk-free rate is 2%. If they intend to form a complete portfolio of the risk-free asset and one of the three risky assets, which risky portfolio will be picked by investors X, Y, and Z respectively? 3 O a. X:Asset 2; Y: Asset 2; Z: Asset 2 O b. X:Asset 1; Y: Asset 1; Z: Asset 1 X: Asset 3; Y: Asset 3; Z: Asset 3 There is no sufficient information to tell Standard deviation O c. Od. O e. X: Asset 3; Y: Asset 2; Z: Asset 1 10% 20% 30%

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

Consider the following portfolio choice problem. The investor has initial wealth w and utility u(x) = . There is a safe asset (such as a US government bond) that has net real return of zero. There is also a risky asset with a random net return that has only two possible returns, R₁ with probability 1- q and Ro with probability q. We assume R₁ 0. Let A be the amount invested in the risky asset, so that w - A is invested in the safe asset. 1) Find A as a function of w
Assume that you have all your wealth (one million dollars) invested in the Vanguard 500 index fund, and that you expect to earn an annual return of 11%, with a standard deviation in returns of 24%. Since you have become more risk averse, you decide to shift $200,000 from the Vanguard 500 index fund to Treasury bills. The T-bill rate is 5%. Estimate the expected return and standard deviation of your new portfolio.
F3
Risky Prospect K is defined as: K = ($8, 0.30 : $13 ,0.70) If my utility of wealth function is given by u (x) = x" and a-0.7, what is my certainty equivalent for prospect K? (What is the value of CE(K)?) (Hint: If u (x) = x", then u- (x) = x) %3D
An investor has a power utility function with a coefficient of relative risk aversion of 3. Compare the utility that the investor would receive from a certain income of £2 with that generated by a lottery having equally likely outcomes of £1 and £3. Calculate the certain level of income which, for an investor with preferences as above, would generate identical expected utility to the lottery described. How much of the original certain income of £2 the investor would be willing to pay to avoid the lottery? Detail the calculations and carefully explain your answer.
Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the past 85 years has averaged roughly 8% more than the Treasury bill return and that the S&P 500 standard deviation has been about 38% per year. Assume these values are representative of investors' expectations for future performance and that the current T-bill rate is 4%. Calculate the utility levels of each portfolio for an investor with A = 3. Assume the utility function is U = E(r) − 0.5 × Aσ2. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 4 decimal places.) WBillsWIndexU(A = 3)0.01.0 0.20.8 0.40.6 0.60.4 0.80.2 1.00.0
Using the Utility Function in Portfolio Management, where the utility function is the constant relative risk aversion utility of wealth function U(W) = W^(gamma)/gamma, set gamma to 0.5 and consider a 50-50 bet on winning 50,000 or getting nothing. What is the certainty equivalent wealth for this bet under these assumptions? Group of answer choices 30,000 10,000 25,000 12,500
A widely used utility function in the economics literature is the constant rate of risk aversion utility function. It is given by: u(c) = c*(1-n) (1-n) Assume that an agent lives for three periods (t-0,1,2) and discounts future utility at rate B (per period). The agent is born with asset level a, and his/her labour market income is yo and y, for periods O and 1 respectively, the agent retire in the last period (no labour income). The interest rate in this economy is r. Please answer the following questions based on the information displayed here. Choose the best option available. Select one: O a. The budget constrain in period t=2 is given by:C2+ ay az(1+r) O b. The budget constrain in period t=2 is given by: Cam a2(1+r) O C. The budget constrain in period t=2 is given by: u(c2)+ a a;(1+r) +ys O d. The budget constrain in period t=2 is given by: C2= az(1+r) +ya O e. The budget constrain in period t#2 is given by: C2+a a(1+r) +ya
A risk averse agent, a risk neutral agent, and a risk loving agent each face the risky situation ($684, $193; 1-0.45, 0.45). Suppose the general form of each agent's utility function is U($X) - a ($X - $Min)^b where a is a strictly positive individual-specific-parameter and where b 0.5 for the risk averse agent and b= 2 for the risk loving agent. What is the combined total sum of the three agents' U(EV)? Please compute and state your answer up to two decimal places
PLEASE PROVIDE CLEAR SOLUTION WITH CLEAR STEPS AND EXPLAINATION - DO NOT ANSWER IF YOU ARE NOT CONFIDENT.
Nick is risk averse and faces a financial loss of $40 with probability 0.1. If nothing happens, his wealth is $260. If there is an actuarially fair insurance available to him, he buys the insurance so that his wealth would be the same in either state. True False Suppose that Jim has a von Neumann-Morgenstern utility function: U(c) = c². %3D Based on his utility function, we can tell that Jim is There is not enough information to determine his risk preference. risk averse. risk neutral. risk loving.
The following payoff table provides profits based on various posible decision alternativesand various levels of demand at Kmart Print Shop. Alternatives Low High Alternative 1 10,000 30,000 Alternative 2 5,000 40,000 Alternative 3 -2,000 50,000 The probability of low demand is 0.4, whereas the probability of high demand is 0.6.What is the highest possible expected monetary value?