your risk-aversion coefficient is A = 3./ and you believe that the entire 1927-20 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 J-B-0.5x Aa ². What if you believe that the 1975-1998 period is representative?
your risk-aversion coefficient is A = 3./ and you believe that the entire 1927-20 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 J-B-0.5x Aa ². 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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Concept explainers
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
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.
Average Annual
Returns
U.S. Equity Market
U.S.
1-Month
Excess Standard
Sharpe
Period
equity
T-Bills
return
Deviation
Ratio
1927-2021
12.17
3.30
8.87
20.25
0.44
1927-1950
10.26
0.93
9.33
26.57
0.35
1951-1974
10.21
3.59
6.62
20.32
0.33
1975-1998
1999-2021
17.97
6.98
10.99
14.40
0.76
10.16
1.66
8.50
18.85
0.45
Required:
a. If your risk-aversion coefficient is A = 3.7 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
UB-0.5× Ao 2
b. What if you believe that the 1975-1998 period is representative?
Complete this question by entering your answers in the tabs below.
Required A
Required B
If your risk-aversion coefficient is A = 3.7 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.
Note: Do not round intermediate calculations. Round your answers to 2 decimal places.
T-bills
Equity
%
%
< Required A
Required B >
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