Practice Quiz

FRM Financial Risk Manager Practice Test

Category - Risk

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Jenny is a gambler who has a utility function that is “more concave” or “curvier” than Tom’s utility function. Who is more risk averse?
  1. Jenny.
  2. Tom.
  3. Both are equal.
  4. None.
Explanation
Jenny is more risk averse than Tom because her utility function is curvier. As she is more risk averse than Tom, she loses more than Tom when risk is introduced.

Key Takeaway: Both Jenny and Tom are risk averse investors who, when faced with two investments with the same expected return but two different risks, prefer the one with the lower risk.
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