This question assumes the standard mean-variance utility function. You are investing in the S&P500 index, along with U.S. Treasury bills. Your risk-aversion is 8. Treasury bills will earn you a return of 6.40%, with no risk associated with them. The S&P500 has volatility 32.70%, but earns a more attractive expected return of 8.90%. What percentage of your wealth should you allocate to Treasury bills?
This question assumes the standard mean-variance utility function. You are investing in the S&P500 index, along with U.S. Treasury bills. Your risk-aversion is 8. Treasury bills will earn you a return of 6.40%, with no risk associated with them. The S&P500 has volatility 32.70%, but earns a more attractive expected return of 8.90%. What percentage of your wealth should you allocate to Treasury bills?
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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This question assumes the standard mean-variance utility function. You are investing in the S&P500 index, along with U.S. Treasury bills. Your risk-aversion is 8. Treasury bills will earn you a return of 6.40%, with no risk associated with them. The S&P500 has volatility 32.70%, but earns a more attractive expected return of 8.90%. What percentage of your wealth should you allocate to Treasury bills?
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An investor needs to allocate portfolio between risk free asset and the index. We have to find the percentage allocation to the risk free assets.
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