Question
Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the past 85 years has averaged roughly 8%
Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the past 85 years has averaged roughly 8% more than the Treasury bill return and that the S&P 500 standard deviation has been about 20% per year. Assume these values are representative of investors expectations for future performance and that the current T-bill rate is 5%.
A. Calculate the expected return and variance of portfolios invested in T-bills and the S&P 500 index with weights as follows:
Wbill | Windex |
0 | 1 |
0.2 | 0.8 |
0.4 | 0.6 |
0.6 | 0.4 |
0.8 | 0.2 |
1 | 0 |
B. Calculate the utility levels (i.e., use the utility function, U = E(r) - 1/2*A*^2) of each portfolio of Problem A for an investor with A = 2. What do you conclude?
C. Repeat Problem B for an investor with A = 3. What do you conclude?
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