Assume an Investor with the Following Utility Function: U =

question 8

Multiple Choice

Assume an investor with the following utility function: U = E(r) − 0.60(s²) . To maximize her expected utility, which one of the following investment alternatives would she choose?

• A) A portfolio that pays 10% with a 60% probability or 5% with 40% probability.
• B) A portfolio that pays 10% with 40% probability or 5% with a 60% probability.
• C) A portfolio that pays 12% with 60% probability or 5% with 40% probability.
• D) A portfolio that pays 12% with 40% probability or 5% with 60% probability.

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Definitions:

Debt Offerings

Debt offerings involve a company issuing debt instruments, like bonds, to raise capital, obligating the company to repay the principal with interest.

Equity Offerings

The process by which companies issue shares of stock to the public or specific investors to raise capital.

Appropriate Price

The price at which assets are considered rightly valued given current market conditions and fundamentals.

Issuing Firm

A company or legal entity that releases, or brings into circulation, financial instruments like stocks, bonds, or securities.