The graph to the right shows the budget line and indifferenc

The graph to the right shows the budget line and indifference curves for two investors, A and B. Labels with the subscript \'m\' refer to the stock market as a whole Which of the following correctly interprets the graphical analysis? ( A. B is more risk averse than A. While B will invest in a mixture of stocks and risk-free T-bills, A will want to invest more than 100 percent of her wealth in stocks B. A is more risk averse than B. While A will invest in a mixture of stocks and risk-free T-bills, B will want to invest more than 100 percent of her wealth in stocks ° C. B is more risk averse than A. Although both investors are risk averse and Rf will want to invest in a mixture of stocks and risk-free T-bills, A will investa greater portion of her wealth in stocks 0 D. A is more risk averse than B. Although both investors are risk averse and will want to invest in a mixture of stocks and risk-free T-bills, B will invest a greater portion of her wealth in stocks Standard deviation of return

Solution

The correct option is D; because the standard deviation for A is less than B implies that the portfolio associated with the portfolio A is less implies that individual A is risk averse and the Ra is close to risk fee return thus he holds a mixture of risk free T-bills and stocks.