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4. Assume two investors A & B have essentially the same belief that US stocks are...

4. Assume two investors A & B have essentially the same belief that US stocks are trading at fair value – meaning they expect to earn the historical risk premium over the next 5-10 years. Use utility theory to explain why investor A might sell his holding in an ETF that tracks the S&P 500, while investor B might buy it.

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Answer #1

Utility theory

Utility theory is based on satisfaction level of person involved here investors ,which varies from person to person .in the present case even though both A AND B believed that market was at a fair value and generates historical risk premium but that was might not return that A was expecting ,it was less than what he expected and it might been more than what B expecting...

So based on on their utility from the stock A opted to sell where B might opted to buy...

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