Q8. Jeff Graefe has a risk-aversion value of 6. He is evaluating three competing investments with the following characteristics. Which investment would have the least utility for Graefe?

A)  A.

B) B.

C) C.

Q9. Dan Laske is evaluating three portfolios for investment of his retirement funds. Laske has a risk aversion value of 5. Which portfolio would be best for him?

A)  B.

B) C.

C) A.

Q10. Walter Staley has recently hired The Joseph Group, a registered investment advisory firm, to manage his $1 million dollar taxable investment portfolio. Staley met with the principals of the firm to define his objectives. It was determined that Staley’s required before-tax return is 6.5%, and his score on a risk-assessment questionnaire was 6, out of a possible 10 indicating risk aversion. Staley can be placed into one of four portfolio allocations to meet his required return and risk objectives:

Based on Staley’s utility adjusted return, the best portfolio for his objectives would be:

A)  Portfolio A.

B) Portfolio B.

C) Portfolio C.

Q11. Daniel Roe and Loretta Morgan are both potential new clients of Grachek Investment Advisors. A summary of Ellen Grachek’s notes concerning the potential clients are as follows:

§       Roe stated that he wants to have a positive return on his $500,000 portfolio at all times, and that his required before-tax return is 7%. On a risk aversion questionnaire, Roe scored an 8, with 10 indicating the highest risk aversion.

§       Morgan indicated that her $1,000,000 portfolio must generate a 2% return each year in order to meet her living expenses without making any withdrawals from the portfolio’s principal. On a risk aversion questionnaire, Morgan scored a 3, with 10 indicating the highest risk aversion.

Grachek Investment Advisors has four model portfolios that they use for each client. Characteristics for each portfolio are identified below:

After reviewing her notes and making some calculations, Grachek makes the following statements regarding each client:

Statement 1:      Based on a utility adjusted return of 2.54%, Portfolio B would be the best choice for Roe.             

Statement 2:      Using Roy’s Safety-First Measure, Portfolio D generates a score of 0.40, and would be the worst choice of the four for Morgan’s portfolio.

Regarding her statements, Grachek is:

A)  Statement 1 is correct; Statement 2 is correct.

B) Statement 1 is incorrect; Statement 2 is incorrect.

C) Statement 1 is incorrect; Statement 2 is correct.