Use the Below Information to Answer the Following Question U = E(r ) - (A/2)s2,where a = 4

question 22

Multiple Choice

Use the below information to answer the following question. $$\begin{array} { l c c } \text { Investment } & \begin{array} { c } \text { Expected } \\\text { Return } \mathrm { E } ( \mathrm { r } ) \end{array} & \begin{array} { c } \text { Standard } \\\text { Deviation }\end{array} \\1 & 0.12 & 0.3 \\2 & 0.15 & 0.5 \\3 & 0.21 & 0.16 \\4 & 0.24 & 0.21 \\\hline\end{array}$$ U = E(r ) - (A/2) s2,where A = 4.0. Based on the utility function above, which investment would you select?

• A) 1
• B) 2
• C) 3
• D) 4
• E) Cannot be determined from the information given.

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Definitions:

Present Value

The value today of a future payment, or series of future payments, discounted at some appropriate interest rate.

Earnings Rate

The rate at which an investment or savings account generates income, usually expressed as a percentage of the principal.

Compound Interest

Interest calculated on the initial principal, including all of the accumulated interest from previous periods on a deposit or loan.

Present Value Factor

A factor used in calculating the present value of a future sum of money or a stream of cash flows, given a specific interest rate.