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Suppose that in the last 20 years the S&P 500 index has yielded an average excess return of 13% 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 13% and an average standard deviation of 22%.
Part 1
Based on the historical data, what must have been the average coefficient of risk aversion?
Part 2
Suppose that the coefficient of risk aversion in the last 20 years was actually 4.1. What is the risk premium that is consistent with the historical standard deviation of 22%?
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