Problem:
Investor X does not mind taking a lot of risk, and reasons as follows: "The risk- free asset offers a very low return (5%). Asset B is better (7% expected return), with some risk (10%), but Asset A is better still (13% expected return), with high risk (40%). Since risk doesn't bother me that much, the optimal strategy for me is to forget about Asset B and the risk-free asset, and invest only in Asset A." What do you think about this reasoning? Can you suggest a better strategy? Explain briefly how Investor X should choose her optimal portfolio. (A diagram may be helpful.)