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Answer: The utility generated for a risk-neutral investor is equal to that for a risk-averse investor.
A risk-free asset (where variance = 0) generates the same utility for all individuals, regardless of their risk preferences. This is because the utility function for a risk-free asset simplifies to U = E(r), as there is no variance term (σ² = 0). Therefore, the utility is identical for both risk-neutral and risk-averse investors.
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An analyst evaluates the utility generated by a risk-free asset for investors with different risk preferences. Which of the following statements is most accurate regarding the utility generated by a risk-free asset for a risk-neutral investor compared to a risk-averse investor?
A
The utility generated for a risk-neutral investor is less than that for a risk-averse investor.
B
The utility generated for a risk-neutral investor is equal to that for a risk-averse investor.
C
The utility generated for a risk-neutral investor is greater than that for a risk-averse investor.