# Calculate the expected utility for both investors if they invested solely in each industry. Which industry does

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## Question:

- Calculate the expected utility for both investors if they invested solely in each industry. Which industry does each investor prefer? What are the reasons for their preference?
- Consider the MATL and HC industries. What is the optimal portfolio for both Boris and Angela that contains these two industries? Discuss what happens to each investor's utility and portfolio risk for this portfolio compared to holding these two industries individually. Will you always reach this conclusion or is specific to these two portfolios?
- Calculate the optimal portfolio for both investors that consists of the following five industries: MATL, CONS, TELE, RE, and HC. How does this portfolio compare to the one industry and two industry portfolios in terms of diversification benefits to each investor?
- Calculate the optimal portfolio for both investors that consists of all eleven industries. Compare this to the other portfolios you have already estimated in terms of diversification benefits. What do you observe? Contrast the differences in what you observe between the two investors.
- Now consider the case where both Boris and Angela can invest in a risk-free asset. The risk-free rate is 0.5% per month. Estimate the optimal combined portfolio for each investor using the five industries in part 3 and then estimate the optimal combined portfolio for each investor using all eleven industries. How does the existence of the risk-free rate affect your conclusion regarding diversification benefits? Are diversification benefits increased or reduced if the investors can borrow or lend at a risk-free rate?

**Related Book For**

## Personal Finance Turning Money into Wealth

ISBN: 978-0133856439

7th edition

Authors: Arthur J. Keown