For risk averse investors, the certainty equivalent adjustment factor is:a.equal to 1b.greater than 1c.indeterminated.smaller than 1
Question
For risk averse investors, the certainty equivalent adjustment factor is:a.equal to 1b.greater than 1c.indeterminated.smaller than 1
Solution
For risk averse investors, the certainty equivalent adjustment factor is smaller than 1. This is because risk averse investors require a premium for taking on risk, and thus, the certainty equivalent (the guaranteed return that they would accept instead of taking a risky investment) is less than the expected return of the investment. Therefore, the adjustment factor, which is the ratio of the certainty equivalent to the expected return, is less than 1.
Similar Questions
1. If the risk-free rate falls, the certainty equivalent adjustment factor will:a.rise for risk averse investors.b.fall for risk averse investorsc.fall for risk seeking investorsd.None of the above.
Investors who require an increased compensation for increased risk have the following risk tolerance/preference:Select one:a. Risk Afraidb. Risk Aversec. Risk Neutrald. Risk Seeking
When an investment advisor attempts to determine an investor's risk tolerance, which factor wouldthey be least likely to assess?A. The investor's prior investing experienceB. The investor's degree of financial securityC. The investor's tendency to make risky or conservative choicesD. The level of return the investor prefersE. The investor's feelings about loss
Risk tolerance is the ability of an individual to discern a certain amount of risk. Select one: True False
Risk perception is an individual’s willingness to accept a certain amount of risk.Select one:TrueFalse
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