Refer the table below on the average excess return of the U.S. equity market and the standard deviation of that excess return. Suppose that the U.S. market is your risky portfolio. Period 1927-2021 1927-1950 1951-1974 1975-1998 1999-2021 Average Annual Returns U.S. equity 12.17 10.26 10.21 17.97 10.16 1-Month T- Bills 3.30 0.93 3.59 6.98 1.66 U.S. Equity Market Standard Deviation 20.25 26.57 20.32 14.40 18.85 Excess return 8.87 9.33 6.62 10.99 8.50 Sharpe Ratio 0.44 0.35 0.33 0.76 0.45 Required: a. If your risk-aversion coefficient is A = 3.5 and you believe that the entire 1927-2021 period is representative of future expected performance, what fraction of your portfolio should be allocated to T-bills and what fraction to equity? Assume your utility function U = E(r) 0.5 × Ag². b. What if you believe that the 1975-1998 period is representative?
Refer the table below on the average excess return of the U.S. equity market and the standard deviation of that excess return. Suppose that the U.S. market is your risky portfolio. Period 1927-2021 1927-1950 1951-1974 1975-1998 1999-2021 Average Annual Returns U.S. equity 12.17 10.26 10.21 17.97 10.16 1-Month T- Bills 3.30 0.93 3.59 6.98 1.66 U.S. Equity Market Standard Deviation 20.25 26.57 20.32 14.40 18.85 Excess return 8.87 9.33 6.62 10.99 8.50 Sharpe Ratio 0.44 0.35 0.33 0.76 0.45 Required: a. If your risk-aversion coefficient is A = 3.5 and you believe that the entire 1927-2021 period is representative of future expected performance, what fraction of your portfolio should be allocated to T-bills and what fraction to equity? Assume your utility function U = E(r) 0.5 × Ag². b. What if you believe that the 1975-1998 period is representative?
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:Refer the table below on the average excess return of the U.S. equity market and the standard deviation of that excess return.
Suppose that the U.S. market is your risky portfolio.
Period
1927-2021
1927-1950
1951-1974
1975-1998
1999-2021
Average Annual
Returns
U.S.
equity
12.17
10.26
10.21
17.97
10.16
U.S. Equity Market
Standard
Deviation
20.25
26.57
20.32
14.40
18.85
1-Month T- Excess
return
8.87
9.33
6.62
10.99
8.50
Bills
3.30
0.93
3.59
6.98
1.66
Sharpe
Ratio
0.44
0.35
0.33
0.76
0.45
Required:
a. If your risk-aversion coefficient is A = 3.5 and you believe that the entire 1927-2021 period is representative of future expected
performance, what fraction of your portfolio should be allocated to T-bills and what fraction to equity? Assume your utility function is
U = E(r) - 0.5 × Ag².
b. What if you believe that the 1975-1998 period is representative?
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