1. Risk aversion and risk preferences -utility curves (20 points): You focus on two groups of participants, those aged around 50 and those nearing retirement aged over 60. You determine that the 60-year-old group is indifferent between investing all of their savings either in the risk-free asset (interest rate of 5%), that might go higher or in the stock market (which you assume has a slightly lower risk premium of 6.0% and a long-term standard deviation of 19%, but is more volatile, interest rate and risk of recession (23%).

a. What is the risk aversion of 60 year-olds using long run historical market returns (10%), and long run and Rf (3%)? NOTE the changed numbers in this part of question.

b. The 50 year olds report that they are indifferent between the two options (equal utility) if the stock market has a risk premium of 5.0% and higher risk free rate of 5%, NOTE the different expectations from 60 year olds. What is the corresponding expected return of stocks? What is the risk aversion of 50-year-olds?

c. You trace out the levels of expected returns and standard deviations (SD 19%) over the allocation for which the two groups are indifferent. To the two points (risk-free, note TWO Rf for 50 year olds and stocks) you add expected return levels for standard deviations of 5%, 10%, and 15%. What are these levels of expected returns with changes in SDs? Report the risk return combinations in a table and in a figure.