A moderately risk-averse investor has 50% of her portfolio invested in stocks and 50% in risk-free...

A moderately risk-averse investor has 50% of her portfolio invested in stocks and 50% in risk-free Treasury bills. Show how each of the following events will affect the investor’s budget line and proportion of stocks in her portfolio:

A. The standard deviation of the return on the stock market increases, but the expected return on the stock market remains the same.

B. The expected return on the stock market increases, but the standard deviation of the stock market remains the same.

C. The return on risk-free Treasury bills increases.

Expert Solution

Answer is A

When people have risk loving behaviour means they are inclined towards taking more risk such as bond and stock market. Risk of investment is measured by variance and standard deviation of possible return . So greater the variance, greater the standard deviation and greater the risk . When people have risk averting behaviour that mean they dont want to take more risk .so lower the variance, lower the standard deviation . Thus leads to lower risk with same expected profit .

Rahul Sunny answered 2 years ago

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