a) Based on the formula for investor satisfaction or utility, which investment would you select if you were risk averse with A =4?

b) If an investor chooses Investment 4, she/he must be risk loving. Do you agree? Why?

Investment Expected Return E(r) Standard Deviation

1 .12 .50

2 .15 .20

3 .27 .30

4 .28 .60

Investor satisfaction with portfolio increases with expected return and decreases with

variance according to the utility formula:

U = E(r)-Ar2 where A = 4