ANS. ANS. a) Following an analysis, Leonard Bates has revealed the following utility preferences to different...

Transcribed Image Text:

ANS. ANS. a) Following an analysis, Leonard Bates has revealed the following utility preferences to different levels of wealth. Wealth ($) 100,000 200,000 Utility (Units) 22 32 37 300,000 What do these figures imply about Leonard's risk preferences (or his willingness to take risk)? Explain fully. b) The share market is currently retuming 12% per annum, while the risk-free asset is retuming 4% per annum Horace Hanley wishes to eam a retum of 9%. What weight should Horace hold in the risk-free asset? T120 Mid-Trimester Assessment: FIN201UG-hvestment Management Page 9 of 12 ANS. c) Assume Andrea Watson, an investor, has log utility. Andrea faces a choice between Investment X with a utility of 6.4000 and Investment Y, which will pay $400 in a bad state of the economy and $800 in a good state of the economy. [There are only two states.] What does the probability of the good state need to be for the investor to be indifferent between Investment X and Investment Y? [NOTE: Indifference arises when both investments have the same utility.] ANS. ANS. a) Following an analysis, Leonard Bates has revealed the following utility preferences to different levels of wealth. Wealth ($) 100,000 200,000 Utility (Units) 22 32 37 300,000 What do these figures imply about Leonard's risk preferences (or his willingness to take risk)? Explain fully. b) The share market is currently retuming 12% per annum, while the risk-free asset is retuming 4% per annum Horace Hanley wishes to eam a retum of 9%. What weight should Horace hold in the risk-free asset? T120 Mid-Trimester Assessment: FIN201UG-hvestment Management Page 9 of 12 ANS. c) Assume Andrea Watson, an investor, has log utility. Andrea faces a choice between Investment X with a utility of 6.4000 and Investment Y, which will pay $400 in a bad state of the economy and $800 in a good state of the economy. [There are only two states.] What does the probability of the good state need to be for the investor to be indifferent between Investment X and Investment Y? [NOTE: Indifference arises when both investments have the same utility.]