Look at the data in Table on the average risk premium of the S&P 500 over T-bills,
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Look at the data in Table on the average risk premium of the S&P 500 over T-bills, and the standard deviation of that risk premium. Suppose that the S&P 500 is your risky portfolio.
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a. If your risk-aversion coefficient is A = 4 and you believe that the entire 1926–2009 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 1968–1988 period is representative?
c. What do you conclude upon comparing your answers to (a) and(b)?
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a If the period 1926 2009 is assumed to be representative of future expected performance then we ...View the full answer
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