Look at the data in Table 6.7 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.

a. If your risk-aversion coefficient is A = 4 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?

b. What if you believe that the 1975–1998 period is representative?

c. What do you conclude upon comparing your answers to

(a) and (b)? p-936