Practice Quiz

FRM Financial Risk Manager Practice Test

Category - Risk

Start a Study Session Sign up for Question of the Day
Tom has the following curve that represents his utility function. What is his attitude to risk?
  1. Risk averse.
  2. Risk neutral.
  3. Risk loving.
  4. Risk seeking.
Explanation
Tom is risk averse. If there is a lottery, Tom prefers the expected value of the lottery to the lottery itself. His utility function reflects his satisfaction for his wealth level and represents his welfare and preferences. Concave utility function shows that each increase in wealth conveys progressively smaller increase to utility.

Key Takeaway: Tom has his utility function concave to the origin because he is risk averse. For a risk neutral investor, his utility function is convex to the origin. For a risk lover, his utility function is a straight line.
Previous Next
Was this helpful? Upvote!
Login to contribute your own answer or details
Start a Study Session Sign up for Question of the Day

Top questions

Related questions

Most popular on PracticeQuiz