Risk and Return Part 1

CFA Level I Portfolio Management
#1

Hi all,

This is the question from CFA textbook:

With respect to utility theory, the most risk-averse investor will have an indifference curve with the:

  1. most convexity.
  2. smallest intercept value.
  3. greatest slope coefficient

The right answer is C, which makes sense. However, the most risk-averse indifference curve will also have the convexity; even while googling the precise definitions of “convexity” and “slope” , I found out that sometimes they used interchangeably. So, I believe 'A" can also be a right answer.

Could anyone explain pls, what us the mistake in my assumption?

CHeers

#2

Convexity and slope are not the same thing.

At all.

#3

A risk-averse investor has a convex indifference curve. The level of convexity (curvature) of an indifference curve is not necessarily discussed in the Utility Theory.

The higher the risk aversion, the higher the slope coefficient of the indifference curve (the level of the steepness of the curve).

As you see, it does nothing to do with curvature.