One pillar on which Mean Variance Optimization rests is the linkage of investor preferences and asset returns.
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Question:
One pillar on which Mean Variance Optimization rests is the linkage of investor preferences and asset returns. Specifically, the assumption that investors make their decisions purely on the basis of expected return (mean) and variance of returns. Using suitable workings, explain how the quadratic utility function below leads to expected utility that depends only on the mean and variance if the the investor's wealth is assumed to be normally distributed. (8mrks)
u() = b2
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