【正文】 iation is equal to or smaller thanAanddecrease the variance of the rate of return. This means that any portfolio that lies northwest ofPStarting atP.ADraw both indifference curves passing through pointDetermining how much risk you can stand—your temperamental tolerance for risk—is more difficult. It isn39。Typically, risk questionnaires include seven to 10 questions about a person39。s value you can stand to lose over months or years. now it39。What would you do if the goal were 15 years away?a.The price of your retirement investment jumps 25% a month after you buy it. Again, the fundamentals haven39。Invest in a moneymarket fund or guaranteed investment contract, giving up the possibility of major gains, but virtually assuring the safety of your principalb.A good investment opportunity just came along. But you have to borrow money to get in. Would you take out a loan?a. salaryc.s portfolio of risky assets asWhen we shift wealth from the risky portfolio to the riskfree asset, we do not change the relative proportions of the various risky assets within the risky portfolio. Rather, we reduce the relative weight of the risky portfolio as a whole in favor of riskfree assets.in theand .46 $42,000 = $19,320 ofB.andy.Rather than thinking of our risky holdings asin the risky portfolio are .54 and .46, respectively, we sell .54 $42,000 = $22,680 ofyB:The weight of the risky portfolio,Access to investment accounts of active investors would provide observations of how portfolio position changes over time. Coupling this information with estimates of the risk–return binations of these positions would in principle allow us to calculate investors39。 1998 by Dow Jones amp。_____ pointsNoneb.A 50% chance to win $5,000c.You39。Do nothingc.Do nothingc.Do nothing and wait for the investment to e backc.t like risk, yet will take more risk than the average person.”t take the idea of risk as seriously as they should, and overexpose themselves to stocks. So before the market goes down and stays down, be sure that you understand your tolerance for risk and that your portfolio is designed to match it.How will the indifference curve of a less riskaverse investor pare to the indifference curve drawn inFigure s risk aversion. Suppose an investor identifies all portfolios that are equally attractive as portfolioIn the expected return–standard deviation plane inmeanvariance (MV) criterionThe selection of portfolios based on the means and variances of their returns. The choic of the higher expected return portfolio for a given level of variance or the lower variance portfolio for a given expected return..Pbecause its expected return is equal to or greater thanP.Figure this investor adjusts the expected returns certainty equivalent rate is simply its expected rate of return.Now we can say that a portfolio is desirable only if its certainty equivalent return exceeds that of the riskfree alternative. A sufficiently riskaverse investor may assign any risky portfolio, even one with a positive risk premium, a certainty equivalent rate of return that is below the riskfree rate, which will cause the investor to reject the risky portfolio. At the same time, a less riskaverse investor may assign the same portfolio a certainty equivalent rate that exceeds the riskfree rate and thus will prefer the portfolio to the riskfree alternative. If the risk premium is zero or negative to begin with, any downward adjustment to utility only makes the portfolio look worse. Its certainty equivalent rate will be below that of the riskfree alternative for all riskaverse investors.p. 164CONCEPTCHECKcertainty equivalent rateThe certain return providing the same utility as a risky portfolio.L,would be passed over even by the most riskaverse of our three investors. All three portfolios beat the riskfree alternative for the investors with levels of risk aversion given in the table.Equation Evaluating Investments by Using Utility ScoresConsider three investors with different degrees of risk aversion:the investor39。s risk aversion. The factor of 189。utilityThe measure of the welfare or satisfaction of an investor.,Intuitively, one would rank each portfolio as more attractive when its expected return is higher, and lower when its risk is higher. But when risk increases along with return, the most attractive portfolio is not obvious. How can investors quantify the rate at which they are willing to trade off return against risk?risk aversepTo gamble is “to bet or wager on an uncertain oute.” If you pare this definition to that of speculation, you will see that the central difference is the lack of “mensurate gain.” Economically speaking, a gamble is the assumption of risk for no purpose but enjoyment of the risk itself, whereas speculation is undertakenexpectedexcess return) and the standard deviation of the rate of return, which we use as the measure of portfolio risk. We demonstrated these concepts with a scenario analysis of a specific risky portfolio (Spreadsheet ). To emphasize that bearing risk typically must be acpanied by a reward in the form of a risk premium, we first distinguish between speculation and gambling.Risk, Speculation, and GamblingOne definition ofwhich allows each investor to assign welfare or “utility” scores to alternative portfolios on the basis of expected return and risk and choose the portfolio with the highest score. We elaborate on the historical and empirical basis for the utility model in the appendix to this chapter.While the task of constructing an optimal risky portfolio is technically plex, it can be delegated to a professional because it largely entails welldefined optimization techniques. In contrast, the decision of how much to invest in that portfolio depends on an investor39。Chapter6: Risk Aversion and Capital Allocation to Risky AssetsC