Question

We are trying to get a sense of how an investor you are advising is trading off risk and return. After several long discussions, you come to the conclusion that his level of risk aversion is somewhere between A=3 or 4.

STEP BY STEP SHOW:

A) Draw the indifference curve in risk-return space corresponding to a utility level of 0.05 for an investor with a risk aversion coefficient A=3. Choose standard deviations ranging from 0 to 0.3 in 0.05 steps

B) Now draw the indifference curve corresponding to a utility level of 0.05 for an investor with risk aversion coefficient A=4.

C) Comparing your answers to part a and b. what do you conclude about the two indifference curves? Particularly, comment on the slope and how this reflects the differences in risk aversion.

Answer 1