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. Average Annual Returns 1-Month U.S. Equity Market Standard Sharpe Ratio 0.41 Еxcess Period 1927-2018 1927-1949 U.S. equity 11.77 T-Bills 3.38 Deviation 20.36 26.83 return 8.34 0.41 9.40 14.00 13.38 10.10 0.92 8.49 0.32 1950-1972 3.14 10.86 17.46 0.62 7.26 18.43 18.39 1973–1995 6.11 0.33 1996–2018 2.21 7.89 0.43 a. If your risk-aversion coefficient is A = 4.9 and you believe that the entire 1927–2018 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 x Ao². (Do not round intermediate calculations. Round your answers to 2 decimal places.) T-bills % Equity b. If your risk-aversion coefficient is A = 4.9 and you believe that the entire 1973–1995 period is representative of future expected performance, what fraction of your portfolio should be allocated to T-bills and what fraction to equity? (Do not round intermediate calculations. Round your answers to 2 decimal places.) T-bills % Equity %
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. Average Annual Returns 1-Month U.S. Equity Market Standard Sharpe Ratio 0.41 Еxcess Period 1927-2018 1927-1949 U.S. equity 11.77 T-Bills 3.38 Deviation 20.36 26.83 return 8.34 0.41 9.40 14.00 13.38 10.10 0.92 8.49 0.32 1950-1972 3.14 10.86 17.46 0.62 7.26 18.43 18.39 1973–1995 6.11 0.33 1996–2018 2.21 7.89 0.43 a. If your risk-aversion coefficient is A = 4.9 and you believe that the entire 1927–2018 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 x Ao². (Do not round intermediate calculations. Round your answers to 2 decimal places.) T-bills % Equity b. If your risk-aversion coefficient is A = 4.9 and you believe that the entire 1973–1995 period is representative of future expected performance, what fraction of your portfolio should be allocated to T-bills and what fraction to equity? (Do not round intermediate calculations. Round your answers to 2 decimal places.) T-bills % Equity %
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.
U.S. Equity Market
Standard
Average Annual Returns
1-Month
Excess
Sharpe
Period
U.S. equity
T-Bills
return
Deviation
Ratio
1927-2018
11.77
3.38
8.34
20.36
0.41
9.40
14.00
13.38
1927-1949
0.92
8.49
26.83
0.32
1950-1972
3.14
10.86
17.46
0.62
1973–1995
1996-2018
0.33
0.43
7.26
6.11
18.43
10.10
2.21
7.89
18.39
a. If your risk-aversion coefficient is A = 4.9 and you believe that the entire 1927–2018 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 x Ao2. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
T-bills
%
Equity
%
b. If your risk-aversion coefficient is A = 4.9 and you believe that the entire 1973–1995 period is representative of future expected
performance, what fraction of your portfolio should be allocated to T-bills and what fraction to equity? (Do not round intermediate
calculations. Round your answers to 2 decimal places.)
T-bills
%
Equity
%
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