Consider the following statements
1. The lower the risk aversion coefficient, the lower the negative impact of risk on portfolio utility.
2. The fact that indifference curves are upward sloping suggests that the investor experience diminishing marginal utility of wealth.
A. Only statement 1 is correct
B. Only statement 2 is correct
C. Both statement is incorrect
B is the answer?
A is the ans.
A is correct. If risk aversion coefficient is low the risk will have low effect on utility beacuse the A has a less weight.
2nd one is wrong because, IC is curved beacuse of diminishing marginal utility not upward sloping. Risk averse investors IC is upward sloping and it is curved due to diminishing marginal utility.
Change the Sub to Port.Mgm. you have pressed derivatives.
Please elaborate on Utility function (mathematical equation)
related to statement 1
Utility function ka jo formula hae
U=E(R) – 1/2 A SIGMA², to sigma² ka U ka upar negative effective hae, ab ea effect kitna hoga vo depend karta ha A ka upar, jiska A kom, vo kamti darta hae as per a peoples with high A, A kom honake bajase jo negative effect ha vo kom ho gaya and U rises.
So a person With A=2 will have higher utility than a person having A = more than 2.
Thanks