Does the answer provided to the following question make sense?
I would have thought that if the IC curve is higher (Stuart) there are less risk averse. Could someone please clarify whether this is incorrect?
An analyst is currently building a portfolio for two of its clients, Alistair and Stuart. Both the investors have different risk preferences. Alistair’s indifference curve lies below Stuart’s indifference curve. Which of the following statements about the clients’ risk tolerance and portfolio preferences is most likely true?
A) Stuart’s optimal portfolio would be acceptable to Alistair.
B) Alistair’s optimal portfolio consists of more risky securities than Stuart’s portfolio.
C) Alistair is more risk averse than Stuart.
Answer provided A)
Alistair’s indifference curve lies below Stuart’s indifference curve. This means that Alistair is less risk averse than Stuart. Therefore, a portfolio that is optimal for Stuart would be acceptable to Alistair.