Question

Suppose investors can either borrow (to buy stocks on margin) or lend at the risk-free rate of r_f = 0.02. The only other investment opportunity is a stock fund with E(r) = 0.089 and σ = 0.139. Investors have the usual utility function U = E(r) - (1/2)Aσ². Investors with risk aversion coefficients A less than _____ should buy the stock fund on margin.

Select one:

a. 4.58

b. 4.35

c. 3.91

d. 3.57

e. 4.13

Answer 1

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