Refer the table below on the average excess return of the U.S. equity market and thestandard deviation of that excess return. Suppose that the U.S. market is your riskyportfolio.Period1927-20211927-19501951-19741975-19981999-2021Average AnnualReturnsU.S.equity12.1710.2610.2117.9710.161-MonthT-Bills3.300.933.596.981.66U.S.Excessreturn8.879.336.6210.998.50Equity MarketStandardDeviation20.2526.5720.3214.4018.85SharpeRatio0.440.350.330.760.45Required:a. If your risk-aversion coefficient is A = 4.9 and you believe that the entire 1927-2021period is representative of future expected performance, what fraction of yourportfolio should be allocated to T-bills and what fraction to equity? Assume your utilityfunction is u = E(r) 0.5 × Ao².b. What if you believe that the 1975-1998 period is representative?

Risk and return are essential financial principles. The term “risk” refers to the uncertainty and…

Required: a. If your risk-aversion coefficient is A = 4.9 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 × Aσ². b. What if you believe that the 1975-1998 period is representative?

Required: a. If your risk-aversion coefficient is A = 4.9 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 × Aσ². 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

See similar textbooks

Related questions

Q: a) Suppose the risk-free rate is `X'% and the expected rate of return on the market portfolio is…

A: Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: A1

A: that an investor expects while putting his investment value at stake. State of Nature…

Q: The expected value, standard deviation of returns, and coefficient below.) Asset A Possible Outcomes…

A: Expected return-The expected return is calculated by multiplying the probability of each possible…

Q: in an "alternate" asset with a standard deviation of 0.41. What expect return does this "alternate"…

A: For the investor to be indifferent between the 2 options, the utility of should be the same. For…

Q: Assume that there is a positive linear correlation between the variable R (return rate in percent of…

A: Positive linear correlation:- It is the relationship between two variables where an increase in the…

Q: Discuss the difference between a price-weighted index and a value-weighted index. Give one example…

A: "Hi, Thanks for the Question. Since you asked multiple question, we will answer first question for…

Q: Suppose you observe the following situation: Security Beta Expected…

A: Select information are available about the two stocks. We have to find out the market return and…

Q: Consider the following regression Pt * - Pt = .07(1.4) + .4*Pt (3.6) + et where Pt * is Shiller’s ex…

A: The efficient markets theory is a theoretical framework that explains the functioning of financial…

Q: 4.What is the expected return, Standard denation and Coeknicient of vanation of an equally werghted…

A: Therefore, the expected return for the S&P 500 is 12%. Therefore, the expected return for…

Q: In the capital asset pricing model, the expected return on an asset with a beta equall to zero would…

A: Solution:-Capital Asset Pricing Model (CAPM) is a model which gives a formula to calculate the…

Q: Suppose that there is an upward shift in the expected rate of return on the risky asset, from 15% to…

A: The Capital Allocation Line (CAL) is a crucial concept in finance that illustrates the trade-off…

Q: Suppose that you have to choose an optimal portfolio from a list of n stocks. Stock i has expected…

A: The minimum variance portfolio:A rational investor is a person who invests in a portfolio on the…

Q: Use the following CAPM equation for a portfolio to answer the questions that follow: E(RP) = RF + βP…

A: Here, E(RP) is 4.2% RF is 1 % βP is 0.8 RM is 5% Actual Portfolio Return is 6%

Q: - Exercise 2 An investor who maximizes a linear mean-variance utility, U(µp, σp) μpaσ, optimally…

A: The objective of the question is to find the efficient frontier, the risk-aversion parameter 'a' of…

Q: If I have that the standard estimator of the volatility parameter is 0.2491, how can I estimate the…

A: The geometric Brownian motion (BM), in stock prices is given by the relationship: S(t) =…

Q: The risk-free rate and the expected market rate of return and 0.056 and 0.125. Using the CAPM model,…

A: The CAPM formula is used to calculate the expected returns of an asset. It is based on the idea of…

Q: onsider the following information (Assume that Security M and Security N are in the same financial…

A: Expected return is calculated by using CAPM equation. CAPM measures systematic risk Expected return…

Q: risk premium (RP) expected return on a portfolio,r^P realized rate of return, r¨ diversification…

A: 1) Risk premium is the return you earn over and above the risk-free rate. It is calculated by…

Q: Could you use formulas in order to get those answers, like the images I have attached to this…

A: Capital budgeting is the process through which a company evaluates and selects long-term investment…

Q: In CAPM and your CAPM Project, the beta of AAPL was computed by regressing the returns of what on…

A: First let us define beta in regression analysis. Beta is the slope of the regression line. It is the…

Q: Interpret your results in (c) above, assuming that the historical average return of 8.5% from the…

A: d) In part c, at a rate of 8.59% the stock is considered to be fairly priced. However, since the…

Q: Mean-variance expected utility is given by Eu = e-, where e is expected return, v is the variance of…

A: Mean-variance expected utility is a concept in finance that combines an investor's preferences for…

Question

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.
Excess
return
8.87
9.33
6.62
10.99
8.50
Equity Market
Standard
Deviation
20.25
26.57
20.32
14.40
18.85
Sharpe
Ratio
0.44
0.35
0.33
0.76
0.45
Required:
a. If your risk-aversion coefficient is A = 4.9 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 × Ao².
b. What if you believe that the 1975-1998 period is representative?

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: Introduction

VIEW

Step 2: Computation

VIEW

Step 3: Computation of fraction for the year 1975-1988

VIEW

Solution

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 4 steps with 4 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

4. Explain what the Capital Asset Pricing Model (CAPM) is and calculate and explain the result of the CAPM based on the following data. a. Expected Return: 8% b. Risk-free rate: 4% c. Beta of the investment: 1.2 ER=Rf+B(ERm - Rf) where: ER = expected return of investment Rf risk-free rate B;= beta of the investment - (ERm - Rf) = market risk premium
What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (SDi), covariance (COVij), and asset weight (Wi) are as shown below? Asset (A) E(R₂) = 25% SDA = 18% WA = 0.75 COVA, B = -0.0009 Select one: A. 13.65% B. 20 U ODN 20.0% C. 18.64% D. 22.5% Asset (B) E(R₂) = 15% SDB = 11% WB = 0.25
Assume a utility function of ? = ?[?] − 1 ?? 2. Which statement(s) is/are correct about investors with this utility function? [I] An investor with a higher degree of risk aversion chooses the optimal portfolio with a higher risk premium [II] An investor with a higher degree of risk aversion chooses the optimal portfolio with lower risk [III] An investor with a higher degree of risk aversion chooses the optimal portfolio with a higher sharpe ratio [IV] The extent to which the investor dislikes risk is captured by ? 2 A. [II] only B. [I], [II] only C. [III] , [IV] only D. [II], [IV] only E. [I], [II], [III] only
If you plot the relationship between portfolio expected return and portfolio beta, what is the slope of the line that results? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) | Slope of the line %
Draw the profit diagram of the portfolio just drawn (and clearly state any assumptions you make). The profit is equal to the difference between the payoff of the portfolio at expiry (maturity) date and the cost of the portfolio. Is the cost of the portfolio positive?
Suppose the utility function is U = E(r) - 0.5Ao2. Draw the indifference curve corresponding to a utility level of 0.2 for an investor with a risk aversion coefficient of 3. Please note the vertical line indicates expected return, and plot standard deviation on the horizontal line.
Bhagi
When, if ever, will the geometric average return exceed the arithmetic average return for a given set of returns? Never When the set of returns includes only risk-free rates. When all of the rates of return in the set of returns are equal to each other.
Suppose you have an investment portfolio with fraction x invested in a market portfolio and (1-x) in a risk- free asset. Increasing fraction x invested in the market portfolio and consequently decreasing (1-x) invested in the risk-free asset shall (select any correct answer, if there are multiple correct answers) Select one or more: O decrease the Sharpe ratio of the resulting portfolio O decrease the expected return of the resulting portfolio increase the Sharpe ratio of the resulting portfolio increase the expected return of the resulting portfolio Dincrease the risk of the resulting portfolio
need help
2. The following table gives information on the return and variance of assets A and B, whose covariance is 0.0003: A B 0} 0,0009 0,0012 E (R₂) 0,05 0,06 a. Does the portfolio (1/3 of A and 2/3 of B) dominate the portfolio (2/3 of A and 1/3 of B)? b. Does the portfolio (1/2, 1/2) belong to the efficient frontier? c. If there were the possibility of lending and borrowing at 2%, would the portfolio (1/2, 1/2) belong to the new efficient frontier?
Calculate the optimal risky portfolio for the following cases when short-sales are allowed. Compute its expected return and the standard deviation of its returns. 1. Two risky assets: Rp = 3, R' = [6, 9], and 4 5 5 20 2. Three risky assets: Rp = 4, R' = [5,9, 8], and [10 0 0 E=0 40 0 0 20 3. Three risky assets: Rp = 5, R' = [12, 9, 8], and 40 10 -5] E= 10 20 0 5 0 30 4. Five risky assets: Rp = 2, R' = [5, 3, 18, 9, 2], and %3D 2 16 0. -12 5 -12 20 16 10 7 14 27 14 9. -13 8. 7 27 13

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS