In the expected return standard deviation space which of the...

In the expected return-standard deviation space, which of the following statements is (are) true for risk-averse investors? I. An investor's own indifference curves might intersect. II. Indifference curves have negative slopes. III. In a set of indifference curves, the direction of increasing expected utility is toward the northwest. IV. Indifference curves are usually convex, indicating diminishing marginal rate of substitution. Multiple Choice: A. I and II only B. II and III only C. I and IV only D. III and IV only E. None of the options are correct.

Transcript

00:01 All right, in the expected return standard deviation space, which is a final statement is or are true for risk -averse investors.

00:10 One, an investor's own indifference curves might intersect.

00:14 Two, indifference curves have negative slopes.

00:17 Three, in a set of indifference curves, the direction of increasing expected utility is toward the northwest.

00:24 Four, indifference curves are usually convex, indicating diminishing marginal rate of substitution.

00:32 So our multiple choice, one, two, we got this.

00:36 All right, so let's see.

00:38 Investors is the first one.

00:40 This statement is true.

00:42 We know for sure this is true.

00:48 Indifference curves represent combinations of expected return and standard deviation that provide the same level of utility to an investor.

00:54 If investors ' indifference curves intersect, it means that the investor is indifferent between the different combinations of expected return and standard deviation, indicating that the investor has no preference for one combination of one over the other.

01:08 So that makes true.

01:09 Second one is also true.

01:15 Also true.

01:19 Indifference curves have negative slopes because as the standard deviation increases, the investor requires a higher expected return to be willing to accept the additional risk.

01:28 This reflects a risk -averse nature of the investor...

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