Figure 27-1
The following figure shows a utility function for Ren.
-Refer to Figure 27-1. From the appearance of the utility function, we know that
A)if Ren owns a house, he would not consider buying fire insurance.
B)Ren would prefer to hold a portfolio of stocks with an average return of 6 percent and a standard deviation of 1 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 5 percent.
C)Ren would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 3 percent.
D)Ren is not risk averse.

Question

Figure 27-1
The following figure shows a utility function for Ren. 
-Refer to Figure 27-1. From the appearance of the utility function, we know that
A)if Ren owns a house, he would not consider buying fire insurance. 
B)Ren would prefer to hold a portfolio of stocks with an average return of 6 percent and a standard deviation of 1 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 5 percent. 
C)Ren would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 3 percent. 
D)Ren is not risk averse.

Quizplus · Accepted Answer

The utility function's appearance, which typically reflects a person's preferences under uncertainty, suggests that Ren is risk-averse. A risk-averse individual prefers investments with less risk for the same level of expected return, hence preferring a portfolio with a lower standard deviation (1 percent) over one with a higher standard deviation (5 percent), assuming the average return is the same (6 percent).

Figure 27-1 The Following Figure Shows a Utility Function for Ren