Marvin is an expected utility maximizer.He chooses his portfolio so as to maximize the expected value of 2,000,000x - x².If m is the mean of Marvin's income and s is the standard deviation, Marvin's income as a function of the mean and standard deviation is A)U = 2,000,000m -s². B)U = 2,000,000m - s. C)U= m - s/2,000,000. D)U = 2,000,000 + s. E)None of the above.

Question

Quizplus · Accepted Answer

The expected income of Marvin is given by E(2,000,000xF1F1F1S1-F1F1F10x²), which can be simplified to 2,000,000xF1F1F1S1m - 2,000,000xF1F1F10s. Since Marvin is an expected utility maximizer, his utility function must be linear in income. Therefore his income as a function of the mean and standard deviation is given by U(2,000,000xF1F1F1S1-F1F1F10x²) = F1F1F1S1(2,000,000m - 2,000,000xF1F1F10s) = 2,000,000xF1F1F1S1m - 2,000,000xF1F1F10s. Thus the answer is A.

Marvin Is an Expected Utility Maximizer