Question

Provide details related to investor utility.

Answer 1

Answer-

Investor utility is measured by how much benefit investors obtain from portfolio performance.

Higher returns are tied with higher risks. The risk-return trade-off follow a linear relaionship, however higher risks may lead to incur severe losses for an investor.

There are three types of utility curves that explain the relationship between investors and risk.

1) Risk averse- This utility refers to the investor taking higher risks to obtain higher returns and the apetite for risk keeps on decreasing with time.

2) Risk neutral - The attitude of the investor to take risk is perfectly linear and investor would continuously take on more risk since this will result in more utility.

3) Risk -loving - The investors attitude towards risk will be exponential and experiences increasing marginal utility.