Question

Problem 6-11 Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the past 85 years has averaged roughly 8% more than the Treasury bill return and that the S&P 500 standard deviation has been about 33% per year. Assume these values are representative of investors' expectations for future performance and that the current T-bill rate is 3%. Calculate the utility levels of each portfolo for an investor with A2. Assume the utility function is U= En - 0.5 x Ao?. (Do not round Intermedlate calculations. Round your answers to 4 decimal places.) WBIls Windex U(A- 2) 1.0 0.0 0.8 0.2 0.4 0.6 0.6 0.4 0.8 0.2 0.0 1.0

Answer 1

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Answer:

2 3 4 1612 (1*2)+(3*4) Return of portfolio Wbills Rbills R index Windex ol 3% 3% 0.21 0.81 3*35% Standard deviation of portfolio Standard de Variance of Portfolio ju 0.11 0.33 0.1089 0.094 0.264 0.069696 0.198 0.039204 0.062 0.132 0.017424 0.046 0.066 0.004356 0.03 0.4 11% 11% 11% 11% 11% 11% 0.078 0.001100 0.024304 0.038796 0.044576 0.041644 0.030000 0.6 0.8 3%

Where U is calculated as  E(R ) - 0.50*A*Variance