risk aversion

Abner is risk averse, this implies that: A: he will choose relatively safe investments B: he will avoid all risks C: he may hold some very risky investments D: his risk tolerance level is very low - Dinesh S

D A- Treasuries could be high risk in high inflation, interest rates, etc. B - unrealistic C - doesn’t make sense D - most correct

E: Abner crapped his pants when he heard about subprime

haha, nice work mwvt9 actually, I think the answer is c, strange as it may sound, A: he will choose relatively safe investments = low risk B: he will avoid all risks C: he may hold some very risky investments D: his risk tolerance level is very low risk aversion means you want to be compensated for taking additional risk, not that you don’t want to take on any risk, put another way, for a given level of return, you prefer lower risk, or for a given level of risk, you prefer higher return, so you and cross b out. Now, with A and D, all the question said was that abner is risk averse, didn’t specify how risk averse he is, so he could be really risk averse, in which case both a and d will be true, or he’s ok risk averse and still be willing to take on some risk, in which case both a and d will be wrong, whereas C can be true in either case, he may hold them, so long he is appropriately compensated for taking on the high risk… is this the answer dinesh? where did you get this question? schweser? what reading and los was this?

I don’t know what the answer is, but on a more serious note all portfolio theory is built on the idea that humans are risk averse. That is why stocks pay more than bonds…you have to get return for your risk…blah blah blah. Even the most risk averse person might want to hold a little bit of equities in their portfolio (assuming they have a decent time horizon). If you take a look at a graph of the efficent frontier you will see that the all bond portfolio always has more risk (and less return = dominated) than the portfolio with about 10% in stocks. By now you all know why. The answer could still be E though.

Nice liaaba. That makes sense

dinesh.sundrani Wrote: ------------------------------------------------------- > Abner is risk averse, this implies that: > A: he will choose relatively safe investments > B: he will avoid all risks > C: he may hold some very risky investments > D: his risk tolerance level is very low > > - Dinesh S One way of answering multiple choice questions is to look for extreme words and generalizing words. Generalizing words are words that make the statement more universally true and extreme words are words that restrict the truth of the answer. B, C, D all have extreme words B. “will” (not might) “all” (not most) C. “very” (gratuitous if the answer is correct) D. “very” (would only go with a “very” risk averse) A. has a word that makes it more inclusive “relatively” (doesn’t say relative to what so you can make up any story you like). Didn’t you guys take SAT prep?

I’m also going with A.

F. It’s a crap question, move on to a better one.

mwvt9 Wrote: ------------------------------------------------------- > E: Abner crapped his pants when he heard about > subprime I crapped my pants when I heard that the answer was ‘C’. I chose D, A and B in that order… but pooped when I heard it was ‘C’. This is one heck of a (messed up) question. - Dinesh S

I really went back and looked out the meaning of averse in an oxford dictionary. ‘liaaba’, you are correct in your explaination. Where did you come across this question before? :slight_smile: ha. A friend of mine gave it to me to put it up on the forum. - Dinesh S

Oh who said it was C? That’s just dumb. “Hi, Mr. I M Scared. I just bought you a limited partnership interest in a rubidium mine. But don’t worry, your portfolio isn’t very risky”

JoeyDVivre Wrote: ------------------------------------------------------- > dinesh.sundrani Wrote: > -------------------------------------------------- > ----- > > Abner is risk averse, this implies that: > > A: he will choose relatively safe investments > > B: he will avoid all risks > > C: he may hold some very risky investments > > D: his risk tolerance level is very low > > > > - Dinesh S > > > One way of answering multiple choice questions is > to look for extreme words and generalizing words. > Generalizing words are words that make the > statement more universally true and extreme words > are words that restrict the truth of the answer. > > B, C, D all have extreme words B. “will” (not > might) “all” (not most) > C. “very” (gratuitous if the answer is correct) > D. “very” (would only go with a “very” risk > averse) > > A. has a word that makes it more inclusive > “relatively” (doesn’t say relative to what so you > can make up any story you like). > > Didn’t you guys take SAT prep? —actually, the extreme words were exactly what I used to figure out the answer is C, all of A, B and D are affirmative, they used “will” and “is”, so it’s absolutely right or it’s wrong, whereas C used “may”, so abner might crap his pants when he heard about subprime, but if someone offered him a ridiculously high return for taking high risk, he may take it, also, “he may hold some very risky investments” doesn’t mean he’ll have it for sure, it’s just that the possibility exists for him to have it, which I think makes perfect sense it’s just like statements like “I may get rich”, maybe I’ll get rich, maybe I won’t, but it doesn’t make the statement invalid…

Doesn’t being risk averse imply that the investor is willing to take risk as long as he/she is compensated for taking this risk? Isn’t this the underlying assumption in risk/return? So wouldn’t C make sense?

if you read my reply, then it’d be yes