Investor with the Higher risk aversion Question

If the answer to the question as posed was “steeper CAL line”, then the answer was wrong. Regardless of their level of risk aversion, if they had homogeneous expectations (which pretty much has to be assumed, or you can’t say anything), ALL investors would choose the CAL with the steepest slope, because it sits above all other CALs. In other words, this “preferred” CAL gives a higher return FOR ANY LEVEL OF RISK than does ANY other CAL.

So if everybody chooses the same CAL, all risk aversion can affect is where a person sits on it. And the more risk averse investor must have a higher weight on the RF asset, and therefore, a lower expected return.