1. Risk averse investors

1. Prefer higher returns to lower returns.
2. May become more or even less risk averse over time.
3. View risk as undesirable; that is as something that reduces their utility
4. Will always prefer higher to lower risk investments.

2. Investors are risk averse because

1. They have less education than other investors do.
2. They have diminishing marginal utility of wealth.
3. They invest for shorter periods.
4. They are more mature investors.

3. An investor experiences diminishing marginal utility of wealth when

1. The gain in utility from gaining an additional dollar of wealth is greater than the loss in utility from losing an additional dollar of wealth. Winning feels better than losing hurts.
2. The loss in utility from losing a dollar of wealth is greater than the gain in utility from gaining a dollar of wealth. Losing hurts worse than winning feels good.
3. The gain in utility from gaining an additional dollar of wealth is equal to the loss in utility from losing an additional dollar of wealth. Winning feels equally good as losing feels bad.
4. The investor is so wealthy that gains and losses no longer matter.

4. Risk averse investors will make risky investments

1. If the expected return on the investment compensates them for the greater risk.
2. If the expected return is greater than the risk-free return
3. If the expected return is greater than zero
4. Risk averse investors will only invest in riskless investments.

5. A key finding of Prospect Theory is that

1. Active investment strategies work as well as passive ones.
2. Stock prices are not very sensitive to current and prospective economic conditions.
3. Investors are risk averse with respect to gains and risk preferers with respect to losses.
4. Investors should never sell stocks that have risen in price more than 10%.