The graph to the right shows the budget line and indifference curves for two inv

Question

The graph to the right shows the budget line and indifference curves for two investors, A and B. Labels with the subscript 'm' refer to the stock market as a whole Which of the following correctly interprets the graphical analysis? ( A. B is more risk averse than A. While B will invest in a mixture of stocks and risk-free T-bills, A will want to invest more than 100 percent of her wealth in stocks B. A is more risk averse than B. While A will invest in a mixture of stocks and risk-free T-bills, B will want to invest more than 100 percent of her wealth in stocks ° C. B is more risk averse than A. Although both investors are risk averse and Rf will want to invest in a mixture of stocks and risk-free T-bills, A will investa greater portion of her wealth in stocks 0 D. A is more risk averse than B. Although both investors are risk averse and will want to invest in a mixture of stocks and risk-free T-bills, B will invest a greater portion of her wealth in stocks Standard deviation of return

Explanation / Answer

The correct option is D; because the standard deviation for A is less than B implies that the portfolio associated with the portfolio A is less implies that individual A is risk averse and the Ra is close to risk fee return thus he holds a mixture of risk free T-bills and stocks.

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