CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

A portfolio has an expected rate of return of 15% and a standard deviation of 15%. The risk-free rate is 6 percent. An investor has the following utility function: U = E(r) - 0.5Aσ2. Which value of A makes this investor indifferent between the risky portfolio and the risk-free asset?
A. 6
B. 7
C. 8
Explanation: 6% = 15% - 0.5 x A x (15%)2
A = 8

User Contributed Comments 2

User Comment
chcarnes Can someone explain this please?
Marinov The two investments A and risk-free need to have the same utilities. Since the risk-free asset has a standard deviation of 0, its utility is equal to its return, that is 6%. For investment A you need to plug all three possible answer at the place of A (risk-aversion coefficient) in the equation and find out which one is equal to 6%.
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