Risk appetite and risk aversion (Trading)



This is one of the practice problems from Curriculum Book (CFAI), Trading subject.
I am really confused about this concept of Risk appetite and risk aversion.

This is what answer part says, “The portfolio managers at North Circle and Valley Ranch have different aversions to risk, with North Circle’s managers having higher risk aversion than the Valley Ranch manager.”

From my understanding, since Valley wants low risk, they must be having higher risk aversion than North Circle.

Am I wrong?

Thanks in advance!

It sounds as though they got that part of the answer wrong.

Is the remainder of the answer consistent with Valley Ranch wanting lower risk than North Circle?

Hello Magician,

Thanks for your reply.
After your feedback, I looked back in the answer. and I attached the table below.

, while North Circle being very wide. Narrow bid-ask spread means high liquidity, now it is opposite and it is very opposite to North Circle which means illiquid situation (higher risk).

By looking at other elements
Long-short strategy vs Long only (Only being more risky)
Bid-ask spread wide vs very wide (very wide being less liquid, thus more risky)

I can see that North Circle is more risk-seeking rather than being highly risk averse.

What do you think?


That all makes sense.

So you mean, the answer may be wrong…
Got you!


My pleasure.