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onlymyworld27
onlymyworld27
06.07.2021 • 
Business

An investor having a risk aversion coefficient (A) equal to 2.5 is considering three portfolios of varying risk and return as shown in the table below. Assuming a risk-free rate equal to 4%, which statement below is CORRECT? Portfolio Return Volatility Sharpe Ratio
Low Risk 7% 10% 0.30
Medium Risk 10% 20% 0.30
High Risk 13% 30% 0.30

Utility of High Risk Portfolio = 6.25%

a. Of the three portfolios, the Medium Risk portfolio provides the highest utility to the investor.
b. Of the three portfolios, the Low Risk portfolio provides the highest utility to the investor.
c. The investor would have the same preference (i.e. utility) for the high and low risk portfolios.
d. Of the three portfolios, the High Risk portfolio provides the highest utility to the investor.
e. All three portfolios provide the same utility to the investor since they all have the same Sharpe ratio and lie on the Capital Allocation Line (CAL)

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