Week 5 Tutorial - Week 5 Tutorial Emily Lo Utility U=E(r...

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Week 5 Tutorial Emily Lo
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Utility U=E(r) 0.5A σ 2 A = level of risk aversion What is A for risk neutral investor? Indifference curve is graphical representation for Utility function Investors choose among competing investment portfolios with the one providing the highest utility level Which one to choose? Portfolio E(r) Risk ( σ ) A 9% 10% B 13% 20% Investor Risk Aversion(A) Utility for Portfolio A Utility for Portfolio B 3.5 5.0
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Efficient Frontier Suppose we have 2 assets, A and B We can construct a portfolio with any weight composition of A and B Which Portfolio shall we pick? (optimal risky portfolio) 1. Minimise the standard deviation for each given expected return to get the efficient frontier
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Which Portfolio shall we pick? (optimal risky portfolio) 2. Given the level of risk aversion, select the portfolio that offers the largest utility When Indifference curve is tangent to the efficient frontier
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Discussion Question C
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