Figure 14-2. The figure shows a utility function for Mary Ann.
-Refer to Figure 14-2. From the appearance of the utility function, we know that
A)if Mary Ann owns a house, she would not consider buying fire insurance.
B)Mary Ann would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 2 percent to a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent.
C)Mary Ann would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 3 percent.
D)All of the above are correct.

Question

Figure 14-2. The figure shows a utility function for Mary Ann. 
-Refer to Figure 14-2. From the appearance of the utility function, we know that
A)if Mary Ann owns a house, she would not consider buying fire insurance. 
B)Mary Ann would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 2 percent to a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent. 
C)Mary Ann would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 3 percent. 
D)All of the above are correct.

Quizplus · Accepted Answer

The utility function is concave, indicating that Mary Ann is risk-averse. Therefore, she would prefer a portfolio of stocks with a lower standard deviation (less risky) even if it means sacrificing some return. Option A cannot be determined from the given information, and Option C is incorrect because the portfolio with an average return of 6 percent and a standard deviation of 3 percent is riskier than the portfolio with an average return of 8 percent and a standard deviation of 5 percent, so Mary Ann would not prefer it.