Scenario 5.10:
Hillary can invest her family savings in two assets: riskless Treasury bills or a risky vacation home real estate project on an Arkansas river. The expected return on Treasury bills is 4 percent with a standard deviation of zero. The expected return on the real estate project is 30 percent with a standard deviation of 40 percent.
-Refer to Scenario 5.10. Hillary's indifference curves showing her preferences toward risk and return can be shown in a diagram. Expected return is plotted on the vertical axis and standard deviation of return on the horizontal axis. Although her indifference curves are upward sloping and bowed downward, their slope is very gradual (they are almost horizontal). These indifference curves reveal that Hillary is:
A) risk neutral.
B) risk averse.
C) risk loving.
D) irrational.

Question

Quizplus · Accepted Answer

Hillary's indifference curves being almost horizontal indicate that she is relatively risk-averse. Therefore, the best choice for her would be to invest in Treasury bills, the riskless asset, which provides a decent expected return of 4 percent.

Scenario 5.10: Hillary Can Invest Her Family Savings in Two Assets: Riskless