Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the past 90 years has averaged roughly 13% more than the Treasury bill return and that the S&P 500 standard deviation has been about 20% per year. Assume these values are representative of investors’ expectations for future performance and that the current T-bill rate is 5%.

A=7

Calculate the expected return E(rp), variance SDp, Vp ,and the utility levels U of portfolios invested in T-bills and the S&P 500 index with weights as follows: 

W bills W index

0 ........1.0

0.2 ........0.8

0.4 ........0.6

0.6 ........0.4

0.8 ........0.2

1.0 ....... 0

What do you conclude in terms of the utility value?

Answer rating: 100% (QA)

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