Assume an investor with the following utility function: U = E(r) − 3/2(s2). To maximize her expected utility, she would choose the asset with an expected rate of return of________and a standard deviation of_____, respectively.

A. cannot be zero, for investors would be unwilling to invest in common stocks.

B. cannot be zero, for investors would be unwilling to invest in common stocks and is negative, as common stocks are risky.

C. cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory.

D. must always be positive, in theory.

E. is negative, as common stocks are risky

A. II only

B. III only

C. I and II only

D. I only

E. I, II, and III

A. the capital gain yield during the period, plus the inflation rate.

B. the change in stock price.

C. the dividend yield, plus the risk premium.

D. the capital gain yield during the period, plus the dividend yield.

E. the current yield, plus the dividend yield.

A. E(r) = 0.10; Variance = 0.25

B. E(r) = 0.15; Variance = 0.20

C. E(r) = 0.12; Variance = 0.35

D. E(r) = 0.10; Variance = 0.20

E. E(r) = 0.15; Variance = 0.25

A. geometric return

B. effective annual rate

C. arithmetic average

D. average annual return

E. historical annual average

A. 45%

B. 5%

C. 50%

D. 32%

E. 40%

A. II and III only.

B. I and III only.

C. III and IV only.

D. I and II only.