Consider the following two assets, A and B: Payoff Fa Fb 0.0001 0 0.005 10 0.33...

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Consider the following two assets, A and B: Payoff Fa Fb 0.0001 0 0.005 10 0.33 0.20 20 0.34 0.59 30 0.33 0.20 39.9999 0 0.005 a) Suppose an investor uses a mean-variance utility to choose among assets. Which asset will she prefer? Does it depend on her tolerance for risk? b) Suppose an investor has preferences represented by a CRRA utility func- tion with coec cient of risk aversion equal to 1. Which asset will she prefer? Consider the following two assets, A and B: Payoff Fa Fb 0.0001 0 0.005 10 0.33 0.20 20 0.34 0.59 30 0.33 0.20 39.9999 0 0.005 a) Suppose an investor uses a mean-variance utility to choose among assets. Which asset will she prefer? Does it depend on her tolerance for risk? b) Suppose an investor has preferences represented by a CRRA utility func- tion with coec cient of risk aversion equal to 1. Which asset will she prefer?

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a To determine which asset the investor will prefer using meanvariance utility we need to consider t... View the full answer