Assume an investor with the following utility function: U = E(r)- 3/2(s²).To maximize her expected utility,she would choose the asset with an expected rate of return of _______ and a standard deviation of ________,respectively A) 12%;20% B) 10%;15% C) 10%;10% D) 8%;10% E) none of these

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Quizplus · Accepted Answer

The investor's utility function includes both the expected return and the level of risk measured by the standard deviation. However, the coefficient of the standard deviation term (-3/2) implies that the investor is risk-averse--the negative value indicates that an increase in risk leads to a decrease in utility (satisfaction). Therefore, the investor will choose the asset with the highest expected return but the lowest possible standard deviation, which minimizes the amount of risk taken to achieve that return level. Among the answer choices, option C) has both an expected return of 10% and a standard deviation of 10%, which fits this criteria.

Assume an Investor with the Following Utility Function: U =