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). With these indifference curves Hillary will invest:
A) most of her savings in Treasury bills, and a small percentage in the real estate project.
B) all of her savings in Treasury bills.
C) half of her savings in Treasury bills and half in the real estate project.
D) most of her savings in the real estate project, and a small percentage in Treasury bills.

Question

Quizplus · Accepted Answer

Hillary's indifference curves are almost horizontal, indicating she has a high tolerance for risk and is willing to accept a higher standard deviation for a higher expected return. Therefore, she will likely invest most of her savings in the high-risk, high-return real estate project.

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