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Suppose that in the last 20 years the S&P 500 index has yielded an average excess return of 12% and an average standard deviation of

Suppose that in the last 20 years the S&P 500 index has yielded an average excess return of 12% and an average standard deviation of 23%.

1. Based on the historical data, what must have been the average coefficient of risk aversion?

2. Suppose that the coefficient of risk aversion in the last 20 years was actually 3. What is the risk premium that is consistent with the historical standard deviation of 23%?

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