Fred and Barney are friends who each own identical holiday houses in the same area of the Snowy Mountains in which bushfires are a known risk. Fred and Barney are both risk-averse.

If Barney is more risk-averse than Fred which of them would be willing to pay more pay more for insurance? Why?

2. Using a diagram, show how mixing a risky and a risk-free asset in a portfolio can make a risk-averse agent better off relative to holding just one of the assets only.