The amount that an investor allocates to the market portfolio is negatively related toI) 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.
A) I and II.
B) II and III.
C) II and IV.
D) II, III, and IV.
E) I, III, and IV.

Question

Quizplus · Accepted Answer

The amount an investor allocates to the market portfolio is positively related to the expected return on the market portfolio, making statement I incorrect. However, it is 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). Higher risk aversion, a higher risk-free rate, or higher market variance all make the market portfolio less attractive compared to safer alternatives, leading to a lower allocation to the market portfolio.

The Amount That an Investor Allocates to the Market Portfolio