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Corporate Finance · Quiz 2 · 16 Mar 2025 · January 2025 term

Question 7: Sarah has mean-variance preferences represented by the ut…

Question 7

+4 marksOne correct option

Sarah has mean-variance preferences represented by the utility function U=2μ−10σ2U = 2\mu - 10\sigma^2, where μ\mu is the expected rate of return and σ\sigma is the standard deviation of the rate of return. He is considering two assets A and B: asset A has a 12% rate of return with 0.40 probability and a 18% rate of return with 0.60 probability, whereas asset B has a 28% rate of return with 0.50 probability and an 8% rate of return with 0.50 probability. Suppose Sarah has to choose between investing in asset A only or asset B only. Which asset would Sarah prefer?

  1. A

    Asset A

  2. B

    Asset B

  3. C

    Sarah is indifferent between the two assets

  4. D

    Information is not sufficient.

Show answer

Correct answer

  • A

    Asset A

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Question 7 of 25 in the IIT Madras BS Corporate Finance (Corporate Finance) Quiz 2 paper sat on 16 Mar 2025, in the January 2025 term (IIT M DEGREE AN EXAM QDB2 16 Mar 2025). It carries 4 marks.

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