Question

27. Seven & Eight Holdings Co Ltd has an expected rate of return of 23%, and a standard deviation of 18%. The risk-free rate is 4%. Suppose all investors have the following utility function: U = E(r)-(@o? You are the advisor for several clients, for whom you have determined the following values of risk aversion, A: Investor Aversion level Fred 11.7 Johnnie Jordan 0.4 Judy Penelope 5.9 Which client is indifferent between Seven & Eight Holdings Co Ltd and the risk-free asset? 28. Your supervisor, Sophia, has given you the following set of annual stock returns for Eiosal Co Ltd Year Return -12.08% 35.95% 38.63% -33.88% 0.00% Find the geometric mean.

Answer 1

1.
The client which will be indifferent between Seven & Eight Holdings Co Ltd and the risk free asset will have same utility in both the cases

Hence, Let Aversion Level be A

=>23%-0.5*A*(18%^2)=4%
=>A=(23%-4%)/(0.5*(18%)^2)
=>A=11.72839506

Hence, Fred will be indifferent

2.
=((1-12.08%)*(1+35.95%)*(1+38.63%)*(1-33.88%)*(1+0%))^(1/5)-1
=1.84%