Figure 9-2. The figure shows a utility function for Mary Ann.

-Refer to Figure 9-2. From the appearance of the utility function, we know that
A) if Mary Ann owns a house, she would not consider buying fire insurance.
B) Mary Ann would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 2 percent to a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent.
C) Mary Ann would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 3 percent.
D) All of the above are correct.

Question

Figure 9-2. The figure shows a utility function for Mary Ann.
 
-Refer to Figure 9-2. From the appearance of the utility function, we know that
A) if Mary Ann owns a house, she would not consider buying fire insurance. 
B) Mary Ann would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 2 percent to a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent. 
C) Mary Ann would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 3 percent. 
D) All of the above are correct.

Quizplus · Accepted Answer

Mary Ann's preference for a portfolio with a lower standard deviation (2% vs. 5%) for the same average return (8%) indicates risk aversion, which is consistent with the appearance of a typical utility function that reflects diminishing marginal utility of wealth.