【正文】 hapter OpenerPARTutility function,An expected return in excess of that on riskfree securities. The premium provides pensation for the risk of an investment.(theWhat is more likely, however, is that the bet results from differences in the probabilities that Paul and Mary assign to the oute. Mary assigns itBoth Paul and Mary should be asking, Why is the other willing to invest in the side of a risky prospect that I believe offers a negative expected profit? The ideal way to resolve heterogeneous beliefs is for Paul and Mary to “merge their information,” that is, for each party to verify that he or she possesses all relevant information and processes the information properly. Of course, the acquisition of information and the extensive munication that is required to eliminate all heterogeneity in expectations is costly, and thus up to a point heterogeneous expectations cannot be taken as irrational. If, however, Paul and Mary enter such contracts frequently, they would recognize the information problem in one of two ways: Either they will realize that they are creating gambles when each wins half of the bets, or the consistent loser will admit that he or she has been betting on the basis of inferior forecasts.p. 162CONCEPTCHECKInvestors who areWe will assume that each investor can assign a welfare, oris an index of the investor39。A,Table . Because the riskfree rate is assumed to be 5%,= 2, while the lowrisk portfolio,portfolios as a= 2?= 0) judge risky prospects solely by their expected rates of return. The level of risk is irrelevant to the riskneutral investor, meaning that there is no penalty for risk. For this investor a portfolio39。 0) is happy to engage in fair games and gambles。s tradeoff between risk and return by plotting the characteristics of potential investment portfolios that the individual would view as equally attractive on a graph with axes measuring the expected value and standard deviation of portfolio the characteristics of one portfolio denotedE(rP) and standard deviation σP, is preferred by riskaverse investors to any portfolio in quadrant IV because it has an expected return equal to or greater than any portfolio in that quadrant and a standard deviation equal to or smaller than any portfolio in that quadrant. Conversely, any portfolio in quadrant I is preferable to portfolioThis is the meanstandard deviation, or equivalently,P,depends on the exact nature of the investor39。ina.But many financial advisers and other experts say that when times are good, some investors don39。to take.s Scudder Kemper Investments Inc., New York, and Vanguard Group in Malvern, Pa.s impossible for someone to assess their risk tolerance alone,” says Mr. Bernstein. “I may say I don39。Sell to avoid further worry and try something elseb.Sellb.Sellb. it could go higher4.$2,000 in cashb.t be able to sell your shares and you will get no dividends. But your investment could multiply as much as 10 times when the pany goes public. How much money would you invest?a.YOUR SCORE169。The most straightforward way to control the risk of the portfolio is through the fraction of the portfolio invested in Treasury bills and other safe money market securities versus risky assets. This capital allocation decision is an example of an asset allocation choice—a choice among broad investment classes, rather than among the specific securities within each asset class. Most investment professionals consider asset allocation the most important part of portfolio construction. Consider this statement by John Bogle, made when he was chairman of the Vanguard Group of Investment Companies:p. 168s overall portfolio prises two mutual funds, one invested in stocks and the other invested in longterm bonds. For now, we take the position of the risky portfolio as given and focus only on the allocation between it and riskfree securities. In the next chapter, we turn to asset allocation and security selection across risky assets.and 46% iny:The weights of each asset class in the plete portfolio are as follows:The risky portfolio makes up 70% of the plete portfolio.p. 169= .7 toBGiven this simplification, we can now turn to the desirability of reducing risk by changing the risky/riskfree asset mix, that is, reducing risk by decreasing the proportionBAfter the sale, the proportions of each asset in the risky portfolio are in fact unchanged:plete portfolioThe entire portfolio, including risky and riskfree assets.,PTable Utility values of possible portfolios for investor with risk aversion, A = 4If you scoredFour months39。Definitely notb.Invest in a 5050 mix of bond funds and stock funds, in hopes of getting some growth, but also giving yourself some protection in the form of steady inec.t changed. After you finish gloating, what do you do?a.Sellb.s a cheap investment, too2.Many experts warn, however, that the questionnaires should be used simply as a first step to assessing risk tolerance. “They are not precise,” says Ron Meier, a certified public accountant.s investing experience, financial security and tendency to make risky or conservative choices.t easy to quantify.Assessing your risk tolerance, however, can be tricky. You must consider not only how much risk you canP.p. 166WORDS FROM THE STREET= 4, presented inInvestors will be equally attracted to portfolios with high risk and high expected returns pared with other portfolios with lower risk but lower expected returns. These equally preferred portfolios will lie in the mean–standard deviation plane on a curve called theP,is superior to it.dominatesP39。s risk. Risk lovers will always take a fair game because their upward adjustment of utility for risk gives the fair game a certainty equivalent that exceeds the alternative of the riskfree investment.AIn contrast to riska