a. Suppose you forecast that the standard deviation of the market return will be 20% in the

Question:

a. Suppose you forecast that the standard deviation of the market return will be 20% in the coming year. If the measure of risk aversion in Equation 5.17 is A = 4, what would be a reasonable guess for the expected market risk premium?
b. What value of A is consistent with a risk premium of 9%?
c. What will happen to the risk premium if investors become more risk tolerant?