Suppose Owen is an investor with risk aversion coefficient 1, Theo is an investor with risk aversion coefficient 2, and Tony is an investor with risk aversion coefficient 3. They all haveutility functions given by
U(r) = E(r) -12· A · V ar(r).
There are four assets available in the financial markets. The first asset is risk-free and has expected return given by ¯r = 0.03. Asset A is risky and has an expected return of 0.07 and a variance of 0.03. Asset B is risky and has an expected return of 0.08 and a variance of0.04. Asset C is risky and has an expected return of 0.9 and a variance of 0.06.
A. If Owen is choosing one of the four assets to invest all his wealth in, which one would he choose? Why? How about Theo and Tony?
B. Draw and label each asset on the graph that has expected return on the vertical axisand standard deviation on the horizontal axis.
C. Draw indifference curves that pass through each asset for Owen. Please pay attentionto the intersection of these indifference curves with the vertical axis.