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:

Cost Curves

Graphical representations showing the relationship between the cost of producing goods or services and the quantity produced.

Optimal Scale

The size of a company or level of production that minimizes costs and maximizes efficiency and profit.

Long-run Equilibrium

A state in which all inputs can be adjusted by firms, market supply meets demand, and no economic profit is earned by firms in a perfectly competitive market.

Long-run Equilibrium

A state in an economy or market where all factors of production and economic variables are balanced, and there are no external pressures forcing change.