I am a bit confused by the examiners' solution for question 1. For iii) we are being asked to plot the three lines of constant expected utility in E–σ space. We were asked to calculate a bunch of expected returns under i) and then the utility under ii). Yet, for iii) in the solutions the examiners provided a plot of the expected returns rather than the utilities. Is it me not understanding the question or is the solution incorrect? Under a circumstance where the examiners' solution is wrong would they just not give students the marks?
Hi Elena, What you are being asked for in part (iii) is to show values of expected return and risk (sigma) which correspond to the three constant utility amounts. The corresponding expected return and risk values can be taken from part (i). In other words, the top line reflects all values of E and sigma, which give a utility of 0.113 , the middle line 0.083 and the bottom line 0.046 (these numbers were calculated in part (ii)). The utility is not one of the axes in the E–σ space, but a line joins points with the same utility. As to the second point, marking is based on the answers presented in the examiners solution (which goes through a number of checks through the exam setting and marking process). However, on occasion there are questions with more than one acceptable approach / answer and the examiners gives marks for these. I hope this helps, please let me know if you have any followups. Alvin.
