【正文】 The Wall Street Journal.Your pany is selling stock to its employees. In three years, management plans to take the pany public. Until then, you won39。s up to you.a.Buy more。What would you do if the goal were 30 years away?a.What would you do if the goal were five years away?a.Just 60 days after you put money into an investment, its price falls 20%. Assuming none of the fundamentals have changed, what would you do?a.The second step, many experts agree, is to ask yourself some difficult questions, such as: How much you can stand to lose over the long term?The benefit of the questionnaires is that they are an objective resource people can use to get at least a rough idea of their risk tolerance. “It39。To that end, many financial advisers, brokerage firms and mutualfund panies have created risk quizzes to help people determine whether they are conservative, moderate or aggressive investors. Some firms that offer such quizzes include Merrill Lynch, T. Rowe Price Associates Inc., Baltimore, Zurich Group Inc.39。stands FourLetter WordWhat fourletter word should pop into mind when the stock market takes a harrowing nose dive?3The indifference curveQWhat can be said about portfolios in quadrants II and III? Their desirability, pared withwhich has expected returnWe can depict the individual39。AAAriskyA1= 5, all of whom are evaluating the three portfolios inis consistent with the notion that utility is enhanced by high expected returns and diminished by high risk. Notice that riskfree portfolios receive a utility score equal to their (known) rate of return, because they receive no penalty for risk. The extent to which the variance of risky portfolios lowers utility depends onAamounts to a gamble. A riskaverse investor will reject it.risk premium personal tradeoffs between portfolio risk and expected return. To do this we introduce a personalspersonalspeculationin spiteIn some cases a gamble may appear to the participants as speculation. Suppose two investors disagree sharply about the future exchange rate of the . dollar against the British pound. They may choose to bet on the oute. Suppose that Paul will pay Mary $100 if the value of 163。 .5, whereas Paul39。1A riskaverse investor will consider risky portfolios only if they provide pensation for risk via a risk premium. A riskneutral investor finds the level of risk irrelevant and considers only the expected return of risk prospects. A risk lover is willing to accept lower expected returns on prospects with higher amounts of investment portfolios that are fair games or worse. Riskaverse investors are willing to consider only riskfree or speculative prospects with positive risk premiums. Loosely speaking, a riskaverse investor “penalizes” the expected rate of return of a risky portfolio by a certain percentage (or penalizes the expected profit by a dollar amount) to account for the risk involved. The greater the risk, the larger the penalty. One might wonder why we assume risk aversion as fundamental. We believe that most investors would accept this view from simple introspection, but we discuss the question more fully in Appendix A of this chapter.score to peting investment portfolios on the basis of the expected return and risk of those portfolios. Higher utility values are assigned to portfolios with more attractive risk–return profiles. Portfolios receive higher utility scores for higher expected returns and lower scores for higher volatility. Many particular “scoring” systems are legitimate. One reasonable function that has been employed by both financial theorists and the CFA Institute assigns a portfolio with expected return is just a scaling convention. To uses degree of risk aversion. More riskaverse investors (who have the larger values ofA1implies that all three investors would assign a utility score of .05 to the riskfree alternative.of return. The certainty equivalent rate is the rate that riskfree investments would need to offer to provide the same utility score as the risky portfolio. In other words, it is the rate that, if earned with certainty, would provide a utility score equivalent to that of the portfolio in question. The certainty equivalent rate of return is a natural way to pare the utility values of peting portfolios.upwardThe tradeoff between risk and return of a potential investment portfolio,P39。It can be stated as follows: portfolioFigure , the preferred direction is northwest, because in this direction we simultaneously increase the expected returnP.is equally desirable to this investor asTo determine some of the points that appear on the indifference curve, examine the utility values of several possible portfolios for an investor withFigure ?b.No, not those. RISK.“Most people can stand to lose a heck of a lot temporarily,” says Mr. Schatsky, a financial adviser in New York. The real acid test, he says, is how much of your portfolio39。Buy more. It was a good investment before。Buy morep. 1672B..Buy more3.re investing for retirement, which is 15 years away. Which would you rather do?a.A 20% chance to win $15,0006.Two months39。 Company. All Rights Reserved Worldwide. implied risk aversion coefficients.We will denote the investor39。P,Example = .56. The risky portfolio would then total only .56 $300,000 = $168,000, requiring the sale of $42,000 of the original $210,000 of risky holdings, with the proceeds used to purchase more shares in Ready Asset (the money market fund). Total holdings in the riskfree asset will increase to $300,000 (1 ? .56) = $132,000, the original holdings plus the new contribution to the money market fund:$90,000 + $42,000 = $132,000EEAs long as we do not alter the weights of each security within the risky portfolio, the probability distribution of the rate of return on the risky portfolio remain