Data from the last eight decades (see Table 5.3) for the S&P 500 index yield the following statistics: average excess return, 7.9%; standard deviation, 23.2%.

a. To the extent that these averages approximated investor expectations for the period, what must have been the average coefficient of risk aversion?

b. If the coefficient of risk aversion were actually 3.5, what risk premium would have been consistent with the market’s historical standard deviation?