Question
Consider historical data showing that the average annual rate of return on the a particular stock portfolio over the past 80 years has averaged roughly
Consider historical data showing that the average annual rate of return on the a particular stock portfolio over the past 80 years has averaged roughly 9% more than the Treasury bill return and that the stock portfolio 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 6%. Calculate the utility levels of each portfolio for an investor with A = 2. Assume the utility function is U = E(r) 0.5 A2.
WBills | WIndex | U(A = 2) | |
0.0 | 1.0 |
| |
0.2 | 0.8 |
| |
0.4 | 0.6 |
| |
0.6 | 0.4 |
| |
0.8 | 0.2 |
| |
1.0 | 0.0 |
| |
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