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You are considering whether to invest in a risky portfolio (P), whose end-of-year cash flow is expected to be $175,000, $110,000, or $85,000 with probabilities
You are considering whether to invest in a risky portfolio (P), whose end-of-year cash flow is expected to be $175,000, $110,000, or $85,000 with probabilities 0.15, 0.50, and 0.35, respectively. Your alternative option is to invest in a one-year risk-free Treasury bill (F) offering a rate of return of 5% (rf).
(10 points) Suppose your utility function is given by: U=E(rP)0.5APP2. What is the coefficient of risk aversion A at which you will be indifferent between the risky portfolio and the risk-free T-bill given the risk premium of 9% ? (Note: Use decimal numbers for E(rP),P, and rf in your calculation.) (10 points) Suppose your utility function is given by: U=E(rP)0.5APP2. What is the coefficient of risk aversion A at which you will be indifferent between the risky portfolio and the risk-free T-bill given the risk premium of 9% ? (Note: Use decimal numbers for E(rP),P, and rf in your calculation.)
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