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2. Why are the indifference curves of typical investors assumed to slope upward to the right?

Indifference curves of “typical” investors are assumed to slope upward to the right because these investors are assumed to be risk averse. As the standard deviation of portfolio returns increases, risk averse investors required higher expected returns if their level of satisfaction is to be maintained. 3. What does a set of convex indifferent curves imply about an investor's trade-off between risk and return as the amount of risk varies? Convex indifference curves (that is, indifference curves whose slopes increase when moving along them from left to right) imply that an investor required an increasingly larger increment of expected return for each additional unit of risk incurred. 4. Why are typical investors assumed to prefer portfolios on indifference curves lying to the northwest? Because those are the portfolios that offer the largest return in the smallest risk level posible, and it’s assumed that investors are rational and risk.averse. 5. What is meant by the statement that risk averse investor exhibit diminishing marginal utility of income? Why does diminishing marginal utility cause an investor to refuse a fair bet? Diminishing marginal utility of income means that an investor gets less additional satisfaction from each extra dollar earned. That is, when an investor earns $10,000 in total, an extra dollar earned is less satisfying than an extra dollar earned when the investor earns $100 in total. As a result of diminishing marginal utility of income, a risk-averse investor will find the dissatisfaction associated with losing $1 in a gamble is greater than the pleasure of winning $1 in the gamble. Therefore, the risk-averse investor will refuse to accept a “fair bet.” 6. Explain why an investor’s indifference curves can’t intersect. If an investor’s indifference curves could intersect it would create a situation in which portfolios on two separate indifference curves would be equally desirable to the investor. However, because each indifference curve defines a different level of satisfaction it would be contradictory for portfolios on different if difference curves to be equally desirable. 7. Why are the indifference curves of more risk-averse investors more steeply sloped than those of investors with less risk aversion? More risk-averse investors require greater increases in expected return than do less risk-averse investors for each unit of extra risk incurred. This requirement is reflected in the great slope of the indifference curves of more risk-averse investors relative to less risk-averse investors