TABLE 6.3 Two-year risk premium, variance, Sharpe and price of risk for three strategies Strategy: Tiriro-ln1 Cine-In2 Risk premium R+R=2i 0+R=R Variance a? + 0'2 = 20'2 O + a"2 = or2 Sharpe ratio" i = 511.1"? Rio = S1 0""? Price of risk5 RIG: = P1 Jii'r'tr2 = P1 lTwoIII." Invest entirely in the risky portfolio for two years. 2{flee-111: Invest entirely in the risky portfolio forone yea: and in rhe risk-free asset in the other. 3Half-in-Two: Im'esl half the budget in the risky portfolio for two years. Risk premium. Standard deviation span: of risk 2 3'5}: "mum 4Sharpe ratio = Reverie Tame 6,3 and mnslder these trlreeryear slrategles' Tnleerln (Tully Invested III the rlsky pomollo In each ofme mree years): Onerln (fully invested in the rlsky pcnmllo In one veal, and in the rlskefree asset III the miller twat and Tnlmrlannree (oneethlm nftne pomolio Invested In me new pomullo and the remalnael In TrDiIIs In each omle lnree years), a. Creale alaule like Table 6 3 forlneselllree slrategles Strategy Tlleeln uneln Tlirlrlanhlee Rlskprernlun. v R+RIR=3R 0mm"? "WWI? 0 Varlance - a' + 0' + 311' 0 +0 + (,2 (71,3 0 Shalpe ralio - = 51 3 mg = 51 = 51 a B if; f u'ifs vr re dlrlsk v we =n Ewen Jr: =3PI 0 n. wnrcn slrategy nas Ine lowest snarpe mm 0 Threeln o @ Onerln O Thirdrlnr Three 1:. wnicn strategy provides me highesl pnoe or Ilsk'i O Threeln G Onerln 9 @ Thirdrlnr Three d. Suppose your risk aversion coelerent Is A = 4, the expected relurn on me nsky porIIaIrd Is 25%, Ille standard devlallon aI Ine nsw portlolro I5 25%, and Ille T-bill rale I5 6% If you were aIIoeatrng your complete portrolio In any year between Three-In and Tprlls, wnal lracllon would you devole Id aneelnv [Roll nd your answer (0 2 declmal places.) Yan-eee] n e. Iryou were allocaling your cumplele porIIoIrd in any year between ThirdInanee and Mills, wnallraclion would you devote to Thlrd-ln-Three? (Round youranswer to 2 decimal places.) yTIIirdr] anhree