Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the past 85 years has averaged roughly 8% more than the Treasury bill return and that the S&P 500 standard deviation has been about 22% per year. Assume these values are representative of investors' expectations for future performance and that the current T-bill rate is 3%. Calculate the utility levels of each portfolio for an investor with A = 3. Assume the utility function is U = E(r) - 0.5 x Ao². (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 4 decimal places.)
Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the past 85 years has averaged roughly 8% more than the Treasury bill return and that the S&P 500 standard deviation has been about 22% per year. Assume these values are representative of investors' expectations for future performance and that the current T-bill rate is 3%. Calculate the utility levels of each portfolio for an investor with A = 3. Assume the utility function is U = E(r) - 0.5 x Ao². (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 4 decimal places.)
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
Problem 1PS
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Transcribed Image Text:Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the past 85 years has averaged
roughly 8% more than the Treasury bill return and that the S&P 500 standard deviation has been about 22% per year. Assume these
values are representative of investors' expectations for future performance and that the current T-bill rate is 3%.
Calculate the utility levels of each portfolio for an investor with A = 3. Assume the utility function is u = E(r) - 0.5 x Ao². (Negative
amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 4 decimal places.)
WBills
0.0
0.2
0.4
0.6
0.8
1.0
Windex
1.0
0.8
0.6
0.4
0.2
0.0
U(A = 3)
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