CAS Exam 9 Spring 2015, Question 1
Study guide: Exam 9
Given the information below describing a three-security financial market, one rational investor's complete portfolio and investors' utility:
| Security | Expected Return | Standard Deviation | Portfolio Allocation |
|---|---|---|---|
| X | 4% | 0% | 43% |
| Y | 10% | 20% | 30% |
| Z | 15% | 30% | 27% |
- Investors assign utility to their portfolios by the formula:
U = E(r) - \frac{1}{2}A\sigma^2.
Part a (0.5 points)
Describe the interpretation of the risk aversion index when A < 0.
Part b (0.75 points)
Calculate the correlation coefficient of the returns of securities Y and Z.
Part c (1 point)
Calculate the value of A for the investor.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution