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A mean-variance investor with a risk aversion of 10 is making a portfolio choice decision between the stock market portfolio and a riskless asset. The
A mean-variance investor with a risk aversion of 10 is making a portfolio choice decision between the stock market portfolio and a riskless asset. The riskless rate of 2% can be used for both borrowing and lending. The investor regresses one-year market returns on the previous year's default spread (in basis points) and obtains an intercept of 0.017 and a slope of 0.002. Currently, the default spread is 75 . The investor uses the regression to obtain an estimate of the expected market return and uses VIX as the volatility measure which is currently at 19%. What fraction of the portfolio does the investor in the riskless asset under optimal portfolio choice? A. 59.3% B. 40.7% C. 65.7% D. 80.5% A mean-variance investor with a risk aversion of 10 is making a portfolio choice decision between the stock market portfolio and a riskless asset. The riskless rate of 2% can be used for both borrowing and lending. The investor regresses one-year market returns on the previous year's default spread (in basis points) and obtains an intercept of 0.017 and a slope of 0.002. Currently, the default spread is 75 . The investor uses the regression to obtain an estimate of the expected market return and uses VIX as the volatility measure which is currently at 19%. What fraction of the portfolio does the investor in the riskless asset under optimal portfolio choice? A. 59.3% B. 40.7% C. 65.7% D. 80.5%
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