For Problems 10 through 12: Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the past 95 years has averaged roughly 8% more than the Treasury bill return and that the S&P 500 standard deviation has been about 20% per year. Assume these values are representative of investors' expectations for future performance and that the current T-bill rate is 2%. 10. Calculate the expected return and variance of portfolios invested in T-bills and the S&P 500 index with weights as follows: W bills 0 Windex 1.0 0.2 0.8 0.4 0.6 0.6 0.4 0.8 0.2 1.0 0 11. Calculate the utility levels of each portfolio of Problem 10 for an investor with A = 2. What do you conclude? 12. Repeat Problem 11 for an investor with A = 3. What do you conclude?
For Problems 10 through 12: Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the past 95 years has averaged roughly 8% more than the Treasury bill return and that the S&P 500 standard deviation has been about 20% per year. Assume these values are representative of investors' expectations for future performance and that the current T-bill rate is 2%. 10. Calculate the expected return and variance of portfolios invested in T-bills and the S&P 500 index with weights as follows: W bills 0 Windex 1.0 0.2 0.8 0.4 0.6 0.6 0.4 0.8 0.2 1.0 0 11. Calculate the utility levels of each portfolio of Problem 10 for an investor with A = 2. What do you conclude? 12. Repeat Problem 11 for an investor with A = 3. What do you conclude?
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:For Problems 10 through 12: Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the
past 95 years has averaged roughly 8% more than the Treasury bill return and that the S&P 500 standard deviation has been about 20%
per year. Assume these values are representative of investors' expectations for future performance and that the current T-bill rate is 2%.
10. Calculate the expected return and variance of portfolios invested in T-bills and the S&P 500 index with weights as follows:
W
bills
0
Windex
1.0
0.2
0.8
0.4
0.6
0.6
0.4
0.8
0.2
1.0
0
11. Calculate the utility levels of each portfolio of Problem 10 for an investor with A = 2. What do you conclude?
12. Repeat Problem 11 for an investor with A = 3. What do you conclude?
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