slope for risk return profile

[hkalra32]

For CML(effecient fronier) slope should be x axis / y axis
so slope should be risk / return
Then when slope decreases why does risk aversion also decreases.
Also I think scweser says - slope = return/risk - if I remember correctly

 

[beatthecfa]

I am not sure what you’re saying here. But risk is on the x axis isn’t it?

 

[rus1bus]

Technical Definition of slope is:
Change of value in Y axis / Change of value in X axis and not the other way round as you have mentioned.

 

[manowar]

The equation of CML likes this
E(c)= (1-y)*risk free + y*E(p) = risk free + y*[E(p) - risk free]
E(c): expected return of the completed portfolio
E(p): expected return of the risky portfolio
SD(c)= y*SD(p)
so the slope here is y= SD(c)/SD(p)
Usually, we are not asked to calculate this slope. Rather, given a number of assets located in the efficient frontier, we then find the portfolio combined of these assets that give us the highest Sharpe ratio.

 

[Alldbest]

Risk aversion is investor will accept higher risk only if compensated with higher returns.
A more risk averse investor will accept the same risk level for more higher returns as compared to a relatively less risk averse investor.
Thus if the slope of the risk return is decreasing investor is willing to take same risk for lesser return as compared to the earlier situation.
Thus when the slop decreases the risk aversion also decreases.

 

[manowar]

I personally think that schweser makes you misunderstand.
From what i know, the slope of CML has nothing to do with risk aversion. The level of risk aversion of each investor in depended on his indifference curve. The steeper the curve is, the more risk averse. Because each investor has unique indifference curve, the optimal completed portfolio varies between them. The optimal portfolio is in the tangent point of investor’s indifference curve and the CML.