- CFA Exams
- CFA Level I Exam
- Topic 9. Portfolio Management
- Learning Module 1. Portfolio Risk and Return: Part I
- Subject 2. Risk Aversion and Portfolio Selection
CFA Practice Question
Which contributes to higher utility, according to the utility theory (for a typical investor)?
II. Higher variance
III. Higher risk-aversion coefficient
I. Higher return
II. Higher variance
III. Higher risk-aversion coefficient
Correct Answer: I
A typical investor is risk-averse, which means the risk aversion coefficient is positive. Based on the utility function U = E(r) - 0.5 x A x variance, only I is correct.
User Contributed Comments 3
| User | Comment |
|---|---|
| gill15 | Why isnt III correct? Higher the value of A the lower the utility score (High positive A from notes is Risk Averse ---- Low utility is less tolerance to risk) |
| gill15 | Never mind... |
| khalifa92 | Utility theory = Expected return - ( 0.5*var*A) those are subtracted contribute to lower utility |