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Question:

Smith has more steeply sloped risk-return indifference curves than Jones. Assuming these investors have the same expectations, which of the following best describes their risk preferences and the characteristics of their optimal portfolios? Smith is:

A more risk averse than Jones and will choose an optimal portfolio with a lower expected return.
Explaination

Steeply sloped risk-return indifference curves indicate that a greater increase in expected return is required as compensation for assuming an additional unit of risk, compared to less-steep indifference curves. The more risk-averse Smith will choose an optimal portfolio with lower risk and a lower expected return than the less risk-averse Jones’s optimal portfolio.