1.An investor having a risk aversion coefficient (A) equal to 2.5 is considering three portfolios of varying risk and return as show in the table below. Assuming a risk-free rate equal to 4%, which statement below is correct?

Portfolio Return Volatility Sharpe Ratio

Low Risk 7% 10% 0.30

Medium Risk 10% 20% 0.30

High Risk 13% 30% 0.30

a.The low risk portfolio maximizes the investor's utility

b.The medium risk portfolio maximizes the investor's utility

c.All portfolio maximizes the investor's utility since all have the same Sharpe ratio and lie on the same Capital Allocation Line (CAL).

d.The high risk portfolio maximizes the investor's utility

The equation for investor utility is as follows:

U=E(r)-1/2 A02

For Low risk portfolio,

U = 7% - (0.5 * 2.5 * 0.1²) = 7% - 1.25% = 5.75%

For Medium risk portfolio,

U = 10% - (0.5 * 2.5 * 0.2²) = 10% - 5% = 5%

For High risk portfolio,

U = 13% - (0.5 * 2.5 * 0.3²) = 7% - 1.25% = 2%

This question already has a solution, my question is WHERE IS THE HIGHLIGHTED 0.5 IN THIS SOLUTION COMES FROM??????

U = 7% - (0.5 * 2.5 * 0.1²) = 7% - 1.25% = 5.75%