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Historical data for the S & P 500 Index show an average excess return over Treasury bills of about 8.5 % with standard deviation of
Historical data for the S & P 500 Index show an average excess return over Treasury bills of about 8.5 % with standard deviation of about 20 %. To the extent that these averages approximate investor expectations for the sample period, what must have been the co-efficient of risk aversion of the average investor? If the co-efficient of risk aversion were 3.5, what risk premium would have been consistent with the markets historical standard deviation?
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