Assume that your risk aversion (A) is 2 and that your utility can be described by...
Assume that your risk aversion (A) is 2 and that your utility can be described by the following function:
U = E(r) - 1/2Aσ2
What is your utility for the following security x:
βx = 1.7
rm = 0.07
rf = 0.02
σ = 0.12
Please use two decimal points (or more) in your answer, and answer in decimal form (so if your calculation shows 0.13, then answer 0.13 and not 13 as in 13 %).
Also remember that you need to use a dot and not a comma to represent your decimal separator.
Homework Answers
Expected return=risk free rate+beta*(market return-risk free rate)=0.02+1.7*(0.07-0.02)=0.105
Utility=0.105-0.5*2*(0.12)^2=0.0906
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