Another Qbank Portfolio Management qestion investor, require, return, making, taking

HuskyGrad2010

Investors who are less risk averse will have what type of utility curves?
A) Flatter.
B) Inverted.
C) Steeper.
the answer is A , I answered C based on the fact that a less risk averse investor would require more return to compensate him/her for taking more risk making the slope of the indifference curve more steeper, what do u think ?

agulani

If the investor is less risk averse, it means that he requires a relatively small additional compensation in form of return for taking more risk –the utility curve is flatter than the one of a more risk averse investor would be.

thisisbrianly

I understand this , but I thought of a more steeper curve as a motive for the investor to undertake more risk in terms of higher return.

lxwarr30

Well, I guess, if you are riskfriendly, it means you like risk and then you don’t need any special motivation to take it .

troymo

A risk averse person, necessarily, has diminishing marginal utility from income; They get less usefulness from each extra dollar of income (or stuff).
This is evidenced by the fact that a risk averse person would rather remain at their current income level than risk a dollar to gain a dollar (in a 50/50 gamble).
So the utility curve (drawn on a graph with Utility on the X axis and Income on the Y axis) of a risk averse person has to “curve” downward: It’s slope must decrease as we move along it towards higher income levels. If you drew a tangent on this curve, it would only touch on one point. If it touched in two, it would represent an evenmoney gamble that this supposedly risk averse person would be willing to make.
A completely risk neutral person would be indifferent between making an even money “dollar for a dollar” gamble at any income level. They must value each additional dollar of income the same as the last one. This means their utility curve must be straight; it must have the same slope everywhere. A tangent drawn on it would touch everywhere; they are indifferent.
So the more curved the utility function is, the less a person values the next dollar of income compared to the last and the more risk averse they must be (unwilling to make an evenmoney gamble).