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3 (8) - a. Suppose you forecast that the standard deviation of the market return will be 20% in the coming year. If the measure

3 (8) - a. Suppose you forecast that the standard deviation of the market return will be 20% in the coming year. If the measure of risk aversion in Equation 5.13is A 54, what would be a reasonable guess for the expected market risk premium?

b. What value of A is consistent with a risk premium of 9%?

c. What will happen to the risk premium if investors become more risk tolerant? Equation (5.13) =

A=SampleM2Average(rM)rf

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