Look at the data in Table 6.7 on the average excess return of the Canadian equity market and the standard deviation of that excess return. Suppose that the Canadian market is your risky portfolio.

A. If your risk-aversion coefficient is A = 4 and you believe that the entire 1957-2016 period is representative of future expected performance, what fraction of your portfolio should be allocated to T-bills and what fraction to equity?

B. What if you believe that the 1999-2016 period is representative?

C. What do you conclude upon comparing your answers to (a) and (b)?

Average Annual Returns Canadian Equity 3-Month Market T-Bills Excess Return Canadian Equity Market Standard Deviation Sharpe Ratio Period 5.85 4.47 1957-2016 19571970 1971-1984 1985-1998 19992016 10.34 8.53 13.07 11.20 8.94 4.48 4.06 3.47 3.27 6.55 9.60 17.05 16.60 20.19 14.18 18.05 0.26 0.24 0.17 0.23 7.93 2.40 0.36 Table 6.7 Average annual return on stocks and 3-month T-bills (standard deviation and Sharpe ratio of stocks over time)