Repeat Problem 11 for an investor with A = 3. What do you conclude?

Problem 11

Calculate the utility levels of each portfolio of Problem 10 for an investor with A = 2. What do you conclude?

Portfolio From Problem 10

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

Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the past 85 years has averaged roughly 8% 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%.