Question: An investors utility function is Ui(a) = 3x 1/2 x 2 Act a1 has x 5 0.88, s 2 x 5 0.512, yielding Ui

An investor’s utility function is

Ui(a) = 3x – 1/2 σx 2

Act a1 has x 5 0.88, s 2 x 5 0.512, yielding Ui (a1) 5 2.384. Act a2 has x 5 0.80.

What σx2 would this act require to yield the same utility as a1? Explain the result using the concepts of risk and expected return.


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