3017+Tutorial+2+Solutions.pdf - FINC3017 Investments and Portfolio Management Tutorial 2 Investment Decisions Under Uncertainty 1 How does the level of

3017+Tutorial+2+Solutions.pdf - FINC3017 Investments and...

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FINC3017 Investments and Portfolio Management Tutorial 2 Investment Decisions Under Uncertainty 1. How does the level of risk aversion affect the curvature of indifference curves in mean- standard deviation space. If an investor is highly risk averse, more expected return would be required for each unit of additional standard deviation where utility is held constant. Alternatively, the level of return required to compensate each additional unit of risk is greater for the more risk-averse investor. This can be seen from Figure 7.5 (reproduced below), where the indifference curve I’’ exhibiting greater risk aversion than I’. 2. List two situations where expected returns and standard deviations are sufficient to describe the choice between risky portfolios. Expected return and standard deviation are sufficient to describe the choice between risky portfolios where either the returns are normally distributed or the investor preference function is quadratic. That is, if returns are normally distributed, then it is not important if
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  • Two '13
  • DanikaWright
  • Utility

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