to its employees. In three years, management plans to take the company public. Until then, you wont be able to sell your shares and you will get no dividends. But your investment could multiply as much as 10 times when the company goes public. How much money would you invest? a. None b. Two months salary c. Four months salary     Scoring Your Risk Tolerance To score the quiz, add up the number of answers you gave in each category a-c, then multiply as shown to find your score   (a) answers 1 points (b) answers 2 points (c) answers 3 points   YOUR SCORE points   If you scored . . . You may be a: 9-14 points Conservative investor 15-21 points Moderate investor 22-27 points Aggressive investor   Source: Reprinted with permission from The Wall Street Journal. 1998 by Dow Jones & Company. All Rights Reserved Worldwide.       convenient benchmark for evaluating portfolios. For example, recall the earlier investment problem, choosing between a portfolio with an expected return of 22% and a standard de- viation 34% and T-bills providing a risk-free return of 5%. Although the risk premium on the risky portfolio is large, 17%, the risk of the project is so great that an investor would not need to be very risk averse to choose the safe all-bills strategy. Even for A 3, a mod- erate risk-aversion parameter, equation 6.1 shows the risky portfolios utility value as 22 (.005 3 342) 4.66%, which is slightly lower than the risk-free rate. In this case, one would reject the portfolio in favor of T-bills. The downward adjustment of the expected return as a penalty for risk is .005 3 342 17.34%. If the investor were less risk averse (more risk tolerant), for example, with A 2, she would adjust the expected rate of return downward by only 11.56%. In that case the II. Portfolio Theory 6. Risk and Risk Aversion The McGraw−Hill Companies, 2001