Question

Please solve the problem in the picture (if possible, I would appreciate it if you could also solve this one problem I entered).Thanks you

You are evaluating two investment alternatives. One is a passive market portfolio with an expected return of 10% and a standard deviation of 16%. The other is a fund that is actively managed by your broker. This fund has an expected return of 15% and a standard deviation of 20%. The risk-free rate is currently 7%. Answer the questions below based on this information.

1) How would it affect the graph if the broker were to charge the full amount of the fee?

8.2% 4. You are a financial adviser consulting with a potential individual client on investing. To measure her risk aversion, you ask her to compare the following investments: Investment Expected return E(r) Standard deviation 10.5% 10.1% 6% 19.8% 18% 17.9% 20.45% 25.4% 30.3% Her response is 2<1<4=5<3 (a<b means b is preferred to a, and a=b means a is as good as b). Assume that her utility function is U = E(r) - 0.5A6, where A is the risk- aversion parameter. a. What is the value of your client's risk aversion parameter A? (4 points) b. Calculate the utility for the five portfolios, and check whether the assumed utility function is consistent with your client's response? (4 points)

Answer 1

cuuind Date- /- /- Here the Utility for client 4 and 5 is equal. Vi = E(r)-0.5 Ao² Ug = 0.179 -0.5 A 60.2045) ² in = 0.179 -0.0209A - Us = 0.254 - 0. 5A(0.303) ² Us = 0.254 - D.04 595A - Us -0.254 - 0.04590USA — Now, equating * and ③ ure get 7 11 0.179 -0.0209A=0.254-0.0459045A o.ou59045 A-0.0209A=0.254-0.179 0.0250045A = 0.075 A=3 (rounded off) = 2.999 (exact value) (11) [ using A fron U = 0.105 -0.5(3) (0.101) = 0.0897. U₂= 0.06 - 0.5(3) (0:082) = 0.0499 U3 = 0.198 - 0.5(3) Co. 1872 = 0,1494 y = u5= 0.11626 <3 Now our order = 2 which is same as clien't <1 <4=5 response.