The exploration of portfolio construction starts with grouping investors in three categories: risk-averse, risk-neutral, and risk-lover. Most investors are risk-neutral: they require higher returns for higher risks. Nevertheless, how much more return is required for undertaking some more risk differs between this group of investors and the difference is defined by their individual utility scores, a numerical measurement of their desired risk/return tradeoff.

In this week's Discussion you will reflect upon your own criteria for determining your personal risk/return tradeoff as an investor.

To Prepare

Review this week's Learning Resources, as well as other resources you may access from the Walden Library and the Internet.

Consider the following:

oAre there specific factors that should be considered to determine one's utility function?

oAre any of these factors universal, in other words, considered by all investors, while others are present only for particular investor groups?

oDo you think that there is an objective way of measuring the degree of risk aversion of different investors?