Question
Refer the table below on the average risk premium of the S&P 500 over T-bills, and the standard deviation of that risk premium. Suppose that
Refer the table below on the average risk premium of the S&P 500 over T-bills, and the standard deviation of that risk premium. Suppose that the S&P 500 is your risky portfolio. |
Average Annual Returns | S&P 500 Portfolio | |||||||||
Period | S&P 500 Portfolio | 1-Month T-Bills | Risk Premium | Standard Deviation | Sharpe Ratio (Reward-to- Volatility) | Probability* | ||||
19262012 | 11.67 | 3.58 | 8.10 | 20.48 | 0.40 | |||||
19892012 | 11.10 | 3.52 | 7.59 | 18.22 | 0.42 | 0.94 | ||||
19681988 | 10.91 | 7.48 | 3.44 | 16.71 | 0.21 | 0.50 | ||||
19471967 | 15.35 | 2.28 | 13.08 | 17.66 | 0.74 | 0.24 | ||||
19261946 | 9.40 | 1.04 | 8.36 | 27.95 | 0.30 | 0.71 | ||||
Average annual return on large stocks and 1-month T-bills; standard deviation and Sharpe ratio of large stocks over time |
*The probability that the estimate of the Sharpe ratio over 19262012 equals the true value and that we observe the reported, or an even more different Sharpe ratio for the subperiod. |
a. | If your risk-aversion coefficient is A = 3.5 and you believe that the entire 19262012 period is representative of future expected performance, what fraction of your portfolio should be allocated to T-bills and what fraction to equity? Assume your utility function is U = E(r) 0.5 A2. (Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the "%" sign in your response.) |
T-bills | % | |
Equity | % | |
b. | If your risk-aversion coefficient is A = 3.5 and you believe that the entire 19681988 period is representative of future expected performance, what fraction of your portfolio should be allocated to T-bills and what fraction to equity? (Do not round intermediate calculations.Round your answers to 2 decimal places. Omit the "%" sign in your response.) |
T-bills | % | |
Equity | % | |
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