A Portfolio Has an Expected Rate of Return of 0

question 62

Multiple Choice

A portfolio has an expected rate of return of 0.15 and a standard deviation of 0.15. The risk-free rate is 6%. An investor has the following utility function: U = E(r) − (A/2) s². Which value of A makes this investor indifferent between the risky portfolio and the risk-free asset?

• A) 5
• B) 6
• C) 7
• D) 8

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Definitions:

Self-Incrimination

The act of exposing oneself to prosecution by being forced to respond to questions or by providing evidence in a legal proceeding.

Fifth Amendment

The Fifth Amendment refers to a part of the United States Constitution that provides several protections to individuals, including rights against self-incrimination and double jeopardy, and the assurance of due process.

Establishment Clause

One of two provisions in the First Amendment of the U.S. Constitution that protect citizens’ freedom of religion. It prohibits (1) the establishment of a national religion by Congress and (2) the preference of one religion over another or of religion over nonreligious philosophies in general.

First Amendment

An amendment to the U.S. Constitution protecting freedoms concerning religion, expression, assembly, and the right to petition.