CFA Practice Question

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CFA Practice Question

Which contributes to higher utility, according to the utility theory (for a typical investor)?

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
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