3. Supposethatweinterviewagroupofinvestorswhochosetoinvest60%oftheirportfolio in large US stocks and 40% in the risk-free asset. We then ask them which asset from (2) that they prefer. Most answer that they prefer (b). If we believe that the investors in the group are consistent in their choices, what does this imply about the quadratic utility function? If we believe that the quadratic utility function is the correct utility function, what does this imply about the consistency of investors’ preferences?
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