Question: A particular portfolio has an expected return of .20 and a standard deviation of .20. Treasury Bills offer a sure rate of return of .07. Suppose each investor must choose to invest exclusively in either the portfolio or Bills (mixtures are not feasible). Investor A has a utility function given by UA = E(Rp) - 2 ?p2 while investor B's utility is UB = E(Rp) - 4 ?p2 .

A. Who is the more risk-averse investor, A or B? (Hint: how do the slopes of their indifference curves compare?) Please illustrate on a graph. Explain your reasoning.

B. Which investment alternative will each investor choose? Does the more risk-averse investor choose the risk-free investment?