Question

Please explain the 3 categories of risk preference and which category applies to the average investor. ( write it by text please)

Answer 1

3 categories of risk preference are:

1. Risk neutral - these type of investors simply wants to maximize their expected value.
2. Risk averse - these type of investors values each dollar less than the previous. These preferences explain why people buy insurance. In other words, A risk averse investor is an investor who prefers lower returns with known risks rather than higher returns with unknown risks. These investments include, for example, government bonds and Treasury bills.
3. Risk seeker - these type of investors accept greater volatility and uncertainty in investments or trading in exchange for anticipated higher returns. Example is small cap emerging markets equity investors.

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