a) Your father argues that he can make more money if he borrows money to invest in the Hang Seng Index at a margin of 50%. Your father’s utility function is UF = E(r) – ½AFs2 , where AF = 2. Assume he can borrow at an interest rate of 0.5% per month. Also assume that he will not face any margin calls. Given your estimates from the historical returns, explain to him whether buying the Hang Seng Index on a 50% margin or investing in the Hang Seng Index without borrowing is a better strategy based on his utility function.

b) Can we conclude from the calculation in part (a) that all risk-averse investors would make the same choice (50% margin or no margin)?