You are hired to make investment decisions for a large pension fund. You meet with representatives from the company to figure out what kind of choices to make. To get things started you try to figure out their risk preferences. You discuss the concept of risk and return with them to figure out what their level of risk aversion is.
You ask them if they would rather invest in a portfolio that offers an expected rate of return of 7% and a standard deviation of 15% or in the short term money market which offers a risk-free 2% rate of return. They say that they prefer the risky portfolio.
What is the maximum level of risk aversion for which the risky portfolio is still preferred to the risk free investment? What can you now say about the company's employees' risk preferences?
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