answer only 4 , 5 , and 6 the ((circled questions)) 30 50 16 24 be basis of the

Question

answer only 4 , 5 , and 6 the ((circled questions))

30 50 16 24 be basis of the utility which investmentw s of the utility formula above, which investment would you select if you were risk neutral? ula above, which investment would you select if you were risk the basis averse with A 4? On the basis The variable (A) in the utility formula represents the: utility 2 a investor's return requirement h investor's aversion to risk e certainty equivalent rate of the portfolio. d preference for one unit of return per four units of risk. Use the following graph t o answer CFA Problems 4 and 5. Expected Return, Elr) Capital 1 Allocation Line (CAL) Risk, indifference curve represents the greatest level of utility that can be achieved by the Which point designates the optimal portfolio of risky assets? Given $100,000 to invest, what is the expected risk premium in dollars of investing in equities versus risk-free T-bills on the basis of the following table? Expected Return $50,000 $30,000 s5,000 Probability Action Invest in equities Invest in risk-free T-bils 4 1.0

Explanation / Answer

4)

Answer is Indifference curve 2.

The consumer will receive maximum utilty, when the indifference curve is tangential to the budget line(budget line here is the CAL)

5)

Here point F represents the optimal portfolio of the investor(including both risky and riskless)

But point E represents the optimal portfolio of risky assets only.

6)

expected return in dollars =

(probablity of equity 1) * (expected return 1) + (probablity of equity 2) * (expected return 2)

= 0.6 * 50,000 + 0.4 * - 30,000 = 18,000

Expected risk premium = 18,000 - 5000 = 13,000

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