Assume the risk-free rate (T-bill rate) is 2% pa, the standard deviation of the market is 18% and it is expected to remain the same over next year.

If the return on the market index is forecasted to be 10% over the coming year (show all answers correct to 2 decimal places):

a. Calculate the degree of risk aversion (A) for an investor in the market index.

b. What would the standard deviation (expressed as a percentage) of the market be in the coming year if the degree of risk aversion in the market index were 2?

c. Calculate the Sharpe ratios for the market index in both situations a. and b. above, respectively.