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Suppose an Asset Has a Risky Return Given By xN(μ,σ2)x \sim N\left(\mu, \sigma^{2}\right)

Question 24

Multiple Choice

Suppose an asset has a risky return given by xN(μ,σ2) x \sim N\left(\mu, \sigma^{2}\right) . Yi-Yi believes the return on the asset is given by x^N(μ^,σ2) \hat{x} \sim N\left(\hat{\mu}, \sigma^{2}\right) , where μ^>μ\hat{\mu}>\mu . Kyle believes the return on the asset is given by xN(μ,σ2) x \sim N\left(\mu, \sigma^{2}\right) . Kyle and Yi-Yi have the same risk averse preferences. Which of the following is true?


A) Kyle requires a larger risk premium on the asset than Yi-Yi.
B) Yi-Yi requires a larger risk premium on the asset than Kyle.
C) Kyle is more likely to purchase the asset.
D) Yi-Yi and Kyle require the same risk premium.

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