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2. 3. The indifference curves of typical investor are assumed to slope upward to the right because the investor is assumed to be risk averse. As the standard deviation of portfolio returns increases, a risk averse investor requires higher expected returns if his or her level of satisfaction is to be maintained. 6. Diminishing marginal utility of wealth means that an investor derives less additional satisfaction from each extra dollar of wealth. That is, when an investor’s wealth changes by $10,000 based on the result of a gamble, the extra dollar in additional wealth is less satisfying than the extra dollar in additional wealth when the investor’s wealth changes by only $100 based on the results of a gamble. 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. 9. a. Hack is less risk averse because Hacks indifference curves are less steeply sloped than are Kikis. b. Hack is indifferent between investments A and B because they lie on the same indifference curve. Kiki, however, prefers investment A to investment B because it lies on a higher indifference curve. c. Both investors prefer investment D to investment C because it lies on higher indifference curve for both of them. 10. Stock C is preferred to stock B because it has both a higher expected return and lower risk. For the same reasons, stock D is preferred to stock A. 12. The initial value of Cornss portfolio is: W0 = ($50 ( 100) + ($35 ( 200) + ($25 ( 50) + ($100 ( 100)= $23,250 The proportion that each security constitutes of Cornss initial portfolio is: XA = ($50 ( 100)/($23,250)= .215 XB = ($35 ( 200)/($23,250) = .301 XC = ($25 ( 50)/($23,250)= .054 XD = ($100 ( 100)/($23,250)= .430 The expected returns on the portfolio securities are: = ($60 - $50)