Question

After meeting with the client, she informs you that she prefers a return higher than that of the optimal risky portfolio. Is this possible to achieve and if so, how? What does that indicate about your initial assumptions regarding the indifference Curve?

Answer 1

Optimal risky portfolio means at  a particular level of return, the risk is minimized. As per the demand of client, return of the optimal risky portfolio, can be increased and it will happen by including more of those kind of stocks or assets that are more risky, but offering higher returns. It will increase the return of the portfolio, but risk will also increase. For example, if risk free assets and risky asset, both are 50% each, then to get higher returns, risk free assets will be reduced from 50% to say, 30%. At the same time, risky assets will be increased from 50% to 70%. This portfolio will give higher returns.

It indicates that my initial assumption that each client will prefer a return, that has the lowest risk at that level of return. But, clients have different level of expectations, satisfactions so, a different indifference curve.