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Question:
Consider the following statements:
Statement 1: A risk‐averse investor can attain a better risk-return tradeoff by investing a portion of his portfolio in Asset A, which is more risky than his current portfolio, only if the correlation between his current portfolio and Asset A is negative.
Statement 2: A more risk‐averse investor will have a steeper indifference curve than a less risk‐averse investor.
Which of the following is most likely?
A
Only Statement 2 is correct.
explanation
•A risk‐averse investor can attain a better risk‐return tradeoff by investing a portion of his portfolio is a more risky asset as long as the correlation between his current portfolio and the asset is less than 1.
• Statement 2 is correct.
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