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6. In this question, you are asked to evaluate the common portfolio advice of a 60/40 split between stocks and bonds. Suppose the expected rate of return on equities is 8%/year and the standard deviation of the return on equities is 19%/year. T-Bills earn 1%/year (assume they are riskless). (a) What is the implied risk aversion coefficient of an investor for whom a 60/40 split is optimal? (b) Plot the CAL along with a couple of indifference curves for the investor type identified above.

6. In this question, you are asked to evaluate the common portfolio advice of a 60/40 split between stocks and bonds. Suppose the expected rate of return on equities is 8%/year and the standard deviation of the return on equities is 19%/year. T-Bills earn 1%/year (assume they are riskless). (a) What is the implied risk aversion coefficient of an investor for whom a 60/40 split is optimal? (b) Plot the CAL along with a couple of indifference curves for the investor type identified above.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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6. In this question, you are asked to evaluate the common portfolio advice of a 60/40 split between stocks and bonds. Suppose the expected rate of return on equities is 8%/year and the standard deviation of the return on equities is 19%/year. T-Bills earn 1%/year (assume they are riskless). (a) What is the implied risk aversion coefficient of an investor for whom a 60/40 split is optimal? (b) Plot the CAL along with a couple of indifference curves for the investor type identified above.
Transcribed Image Text:6. In this question, you are asked to evaluate the common portfolio advice of a 60/40 split between stocks and bonds. Suppose the expected rate of return on equities is 8%/year and the standard deviation of the return on equities is 19%/year. T-Bills earn 1%/year (assume they are riskless). (a) What is the implied risk aversion coefficient of an investor for whom a 60/40 split is optimal? (b) Plot the CAL along with a couple of indifference curves for the investor type identified above.
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