Investment and Risk Management 022-2023 Tutorial solutions – Portfolio Risk and Return

Investment	Expected Return (%)	Expected Standard Deviation (%)
Utility A = 0
1	18	2	0.1800
2	19	8	0.1900
3	20	15	0.2000
4	18	30	0.1800

19. Investment 4 provides the highest utility value (0.2700) for a risk-seeking investor, who has a measure of risk aversion equal to −2.

Investment	Expected Return (%)	Expected Standard Deviation (%)	Utility A = –2
1	18	2	0.1804
2	19	8	0.1964
3	20	15	0.2225
4	18	30	0.2700

20. Investment 2 provides the highest utility value (0.1836) for a risk-averse investor who has a measure of risk aversion equal to 2.

Investment	Expected Return (%)	Expected Standard Deviation (%)	Utility A = 2
1	18	2	0.1796
2	19	8	0.1836
3	20	15	0.1775
4	18	30	0.0900

21. Investment 1 provides the highest utility value (0.1792) for a risk-averse investor who has a measure of risk aversion equal to 4.

Investment	Expected Return (%)	Expected Standard Deviation (%)	Utility A = 4
1	18	2	0.1792
2	19	8	0.1772
3	20	15	0.1550
4	18	30	0.0000

22. A is correct. The CAL is the combination of the risk-free asset with zero risk and the portfolio of all risky assets that provides for the set of feasible investments. Allowing for borrowing at the risk-free rate and investing in the portfolio of all risky assets provides for attainable portfolios that dominate risky assets below the CAL.
23. B is correct. The CAL represents the set of all feasible investments. Each investor’s indifference curve determines the optimal combination of the risk-free asset and the portfolio of all risky assets, which must lie on the CAL.
24-25 Home assignment
26-33 Home assignment