# Question

Look at the data in Table 5.7 regarding the average risk premium of the S& P/TSX Composite over T-bills and the standard deviation of that risk premium. Suppose that the S& P/TSX Composite is your risky portfolio.

a. If your risk-aversion coefficient is 2 and you believe that the entire 1957– 2012 period is representative of future expected performance, what fraction of your portfolio should be allocated to T-bills and what fraction to equity?

b. What if you believe that the most recent subperiod is representative?

c. What do you conclude upon comparing your answers to (a) and (b)?

a. If your risk-aversion coefficient is 2 and you believe that the entire 1957– 2012 period is representative of future expected performance, what fraction of your portfolio should be allocated to T-bills and what fraction to equity?

b. What if you believe that the most recent subperiod is representative?

c. What do you conclude upon comparing your answers to (a) and (b)?

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