When the portfolio manager identifies the highest certainty equivalent return with the feasible risky portfolio, it is the same as identifying the feasible portfolio that places the investor on the highest possible ___________.
A) risky asset
B) risk free portfolio
C) indifference curve
D) benchmark portfolio

Question

Quizplus · Accepted Answer

The highest certainty equivalent return represents the highest return an investor can achieve while taking on a certain level of risk, which means the investor is on an indifference curve that represents the highest level of satisfaction given the level of risk. Choosing the feasible risky portfolio that maximizes the certainty equivalent return places the investor on the highest possible indifference curve. Therefore, the answer is C – indifference curve.

When the Portfolio Manager Identifies the Highest Certainty Equivalent Return