The indifference curves of two investors are plotted against a single budget line. Indifference curve A is shown as tangent to the budget line at a point to the left of indifference curve B's tangency to the same line.
A) Investors A and B are equally risk averse.
B) Investor A is more risk averse than investor B.
C) Investor A is less risk averse than investor B.
D) It is not possible to say anything about the risk aversion of the two investors, but they will hold the same portfolio.
E) It is not possible to say anything about either the risk aversion or the portfolio of the two investors.

Question

Quizplus · Accepted Answer

The fact that indifference curve A is tangent to the budget line at a lower level of utility than indifference curve B implies that investor A is willing to give up more return (i.e. take on more risk) in exchange for a small decrease in risk (and utility) compared to investor B. Therefore, we can say that investor A is more risk averse than investor B.

The Indifference Curves of Two Investors Are Plotted Against a Single