The amount that an investor allocates to the market portfolio is negatively related to I) the expected return on the market portfolio.
II) the investor's risk aversion coefficient.
III) the risk-free rate of return.
IV) the variance of the market portfolio.

Question

Quizplus · Accepted Answer

The amount an investor allocates to the market portfolio is indeed negatively related to the investor's risk aversion coefficient (II), the risk-free rate of return (III), and the variance of the market portfolio (IV). A higher risk aversion coefficient means the investor is less willing to take on risk, leading to a smaller allocation to the riskier market portfolio. A higher risk-free rate makes the risk-free asset more attractive relative to the market portfolio, reducing the allocation to the market portfolio. Lastly, a higher variance of the market portfolio increases the risk associated with it, which can lead to a reduced allocation for risk-averse investors.

The Amount That an Investor Allocates to the Market Portfolio