Question

Suppose that the borrowing rate that your client faces is 11%. Assume that the S&P 500 index has an expected return of 14% and standard deviation of 30%, that If = 6%. What is the range of risk aversion for which a client will neither borrow nor lend, that is, for which y=1? (Do not round intermediate calculations. Round your answers to 2 decimal places.) y = 1 for sas

Answer 1

Solution for the investor is a londe, 'y' must be less than 1, risk a version must be large enough that: 4 - 1 € (am) - 914) . 1.01 XS:D2) As given, Elum) = 14, nf = 6%, 5.D - 30%. A> 114-6)/1.01% 30%) A > 8/x900) A> 8/9 A > 0.888 A > 0.89 for the investow is borrowed , 'y' must be greater than I, risk avervion must be small enough that : ya (Ecom) - 94)/(-01xsta>l. as givenis Ecoma a 14). ; 94 = 11%. ; S.D=30%. AZ (14-"%d01x 30"} A< 3/ ) AC 3/9

AL0.33 for values of risk aversion within this range, the investors Deither borrows for leads, but instead comprised only of the holds a complete portfollio optimal risky portfolio. y=1 for 0.33 < A = 0.89.,