CFAI Text Vol 4, P300, 2nd Paragrapgh under Risk Averse
The last sentence stated :
“A risk-neutral investor would maximize return irrespective of risk and a risk-seeking investor would maximize both risk and return.”
It seems to me that an investor who maximize return irrespecrtive of risk is more risk-seeking, rather than risk-neutral.
Any comment ?
Case 1 : Return – 9% , SD—100%
Case 2 : Return — 10% , SD —200%
Case 3 : Return ---- 9% , SD — 500%
Risk Neutral guy will go for Case 2. He only cares about the return.
Risk seeking guy will go for Case 3. Maybe he is mad, but that’s the case. He just loves the kick.
PS: The figured used are d**n crazy.
A risk averse investor avoids taking risk . He wants maximum profit at minimum risk . He dislikes risk . Whereas on the other hand Risk neutral investor is indefferent with the risk profile.
Guaging by “risk-adjusted return(eg., Sharpe Ratio”, may be case 2 is more risk-averse than case 3 (and even case 1), thus, my question is what are the definitions of risk and return here ?
In the above case Risk neutral guy would go for case 3 since he is indifferent about the risk and would like to maximise returns . He gets the maximum return in case of situation 3 .
A risk averse investor would go for minimum risk case i.e. for case one where the standard deviation is very low.This case is case 1.
@ edupristine
Maximum return is in Case 2 so the risk neutral guy would go for Case 2, not Case 3. Am i missing something here?
@Asuka No we don’t use risk adjusted return here. Just the plain “Risk” and “Return”.