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Question 14. You are trying to create an Optimal Complete Portfolio for your client. To do...

Question 14.

You are trying to create an Optimal Complete Portfolio for your client.
To do this you need to estimate the clients Risk Aversion.
You ask a number of questions, comparing different investment alternatives and conclude that the following two alternatives are equally attractive for the client

E(r)

Stdev

Alt 1

12%

20%

Alt 2

5%

7%

a) what is the clients risk aversion?

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Answer #1

{\displaystyle A={\frac {dE(c)}{d\sigma }}}

A=RISK AVERSION

dE(c) = change in expected return

d(row) = change in standard deviation

A=(0.12-.005)/(0.20-0.07)

=0.07/0.13

=0.54

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