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The expected returns of P,  A,  B, and C are 5%, 8.125%, 10.125%, and 9.125% respectively. While the standard deviations of P, A, B, and C are 10%, 15%, 17%, and 20% respectively.

[1.1, Marks 2] Which of the three indifference curves – denoted with “1”, “2” and “3” on the graph –  passing through P  is associated with a mean-variance investor with a risk aversion of 5? Justify your answer with calculations.

[1.2, Mark 1] Keep assuming a mean-variance investor with a risk aversion of 5 and consider a new portfolio D with a standard deviation of 5%. What expected return portfolio D has to offer to lie on the same indifference curve passing through portfolio P?     

[1.3, Mark 1] Which portfolio would a risk-neutral investor prefer among P, A, B, C and D? Justify your answer.

 

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