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4. An investor has a risk aversion of 4. If she wants to invest all her wealth in the stock market that has a standard deviat

Please use the following formulas to answer the question:

1. Arithmetic average stock returns .-= (+r)x(1+r)x.X(1+r)]š –1 = 19+r)*-1 2. Geometric average stock returns 3. APR versus E

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Answer #1

Risk Aversion factor =4
Standard Deviation of market =16%
Risk Aversion (A) =Risk Premium/Standard Deviation^2
Risk Premium =4*16%^2 =10.24%

If Risk Aversion =2
Then Risk Premium =2*16%^2 =5.12%

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