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Unformatted text preview: Answer: Indifference curves represent the trade-off between two variables. In portfolio building, the choice is between risk and return. The investor is indifferent between all possible portfolios lying on one indifference curve. However, indifference curves are contour maps, with all curves parallel to each other. The curve plotting in the most northwest position is the curve offering the greatest utility to the investor. However, this most desirable curve may not be attainable in the market place. The point of tangency between an indifference curve (representing what is desirable) and the capital allocation line (representing what is possible). is the optimum portfolio for that investor. This question is designed to ascertain that the student understands the concepts of utility, what is desirable by the investor, what is possible in the market place, and how to optimize an investor's portfolio, theoretically. Difficulty: Moderate Bodie, Investments, Sixth Edition...
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- Spring '10