Question: Suppose investor satisfaction with a portfolio increases with expected return and decreases with variance according to the following utility formula: U = E(r) 1 2

Suppose investor satisfaction" with a portfolio increases with expected return and decreases with variance according to the following utility" formula: U = E(r) 1 2 A 2 (r)

Investment Expected Return Standard Deviation
1 0.12 0.30
2 0.15 0.50
3 0.21 0.16
4 0.24 0.21

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

(b) Which investment would you select if you were risk neutral, with A = 0?

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