CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part I
An investor who is risk averse is most likely to:
A risk-averse investor accepts a risky investment only when its expected return exceeds the risk-free rate, because the extra return compensates for bearing risk. Indifference between risky and risk-free assets with equal expected returns describes a risk-neutral investor, not a risk-averse one.
- Aaccept a risky investment only if its expected return exceeds the risk-free rateCorrect
- Bbe indifferent between a risky investment and a risk-free one with the same expected return
- Cchoose the investment with the highest expected return regardless of its risk
Explanation
A risk-averse investor demands a risk premium, so a risky asset must offer an expected return above the risk-free rate. Indifference at equal expected return describes a risk-neutral investor. Ignoring risk entirely is also risk-neutral or risk-seeking behavior.
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