Why are the indifference curves of typical investors assumed to slope upward and to the right?
A) As the standard deviation of portfolio returns increases, risk averse investors require lower expected returns to maintain their level of satisfaction.
B) As the returns of a portfolio increase, risk averse investors require the same not more risk.
C) As the risk of a portfolio increases with the rate of return, risk averse investors will move to a higher indifference curve.
D) As the standard deviation of portfolio returns increases, risk averse investors require higher expected returns to maintain their level of satisfaction.

Question

Quizplus · Accepted Answer

The upward and rightward slope of indifference curves of typical investors is explained by the fact that risk averse investors require higher expected returns to compensate for increased levels of risk. As the standard deviation of portfolio returns increases, investors require a higher expected return to maintain the same level of satisfaction. Therefore, the indifference curve shifts upward and to the right to reflect this higher level of expected return required for a given level of risk.

Why Are the Indifference Curves of Typical Investors Assumed to Slope