Question

Which of the following statement(s) is(are) true regarding the selection of a portfolio from those that lie on the capital allocation line?

I) Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors.

II) More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors.

III) Investors choose the portfolio that maximizes their expected utility.

a. I only
b. I and III
c. II only
d. II and III
e. III only

Answer 1

d. II and III

Step-by-step explanation:

Capital Allocation Line is a graphical representation of risk measurement for risky & risk free assets.

Risk aversion is the tendency of investors to prefer less expected payoff with certainty, over more expected payoff with risk & uncertainty. So, More risk averse investors have their investment concentration in more risk free securities than risky portfolio components, compared to less risk averse investors.

Investors expected utility is derived from their expected income or wealth payoff. Investors choose the portfolio, whose expected income level gives them corresponding maximum expected utility