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Suppose that you are an investor with a risk aversion coefficient of A=5. You are deciding about portfolio allocation between the stock market index portfolio
Suppose that you are an investor with a risk aversion coefficient of A=5. You are deciding about portfolio allocation between the stock market index portfolio and a riskless asset. To come up with the expected market return, you regress one-year market returns on the P/D ratio and you obtain an intercept of 0.26 and a slope of -0.004 , both of which are statistically significant. The current value of P/D is 40 . Assume that the risk-free rate is 1% and your best estimate of conditional market volatility over the next year is 15%. What is the optimal weight of the market index in your portfolio allocation? 20.0% 25.0% 80.0% 75.0%
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