Why do some investors put a large portion of their portfolios into risky assets while others invest largely in$$ risk$-$free alternatives? $($Hint: Do the two investors receive exactly the same return on$$ average? $$Why$?)$

Part $2$

A$.$

A$$ risk$-$averse investor will invest in the largely$$ risk$-$free portfolio, while a$$ risk$-$loving investor will invest in the portfolio of risky assets. In the long$$ run, investors should be indifferent between risky and$$ risk$-$free portfolios because expected returns will be exactly the same.

B$.$

Although two investors are risk$$ neutral, one may be willing to invest in a portfolio of riskier assets provided she is compensated for that risk with a higher expected return.

C$.$

Although two investors are risk$$ averse, one may be willing to invest in a portfolio of riskier assets provided she is compensated for that risk with a higher expected return.

D$.$

A$$ risk$-$loving investor will invest in the largely$$ risk$-$free portfolio, while a$$ risk$-$averse investor will invest in the portfolio of risky assets because the return on the risky portfolio is much higher than the return on the$$ risk$-$free alternatives.