Question: 1. Risk aversion and risk preferences -utility curves (20 points): You are in charge of client risk preference research at a pension fund. You focus

1. Risk aversion and risk preferences -utility curves (20 points): You are in charge of client risk preference research at a pension fund. You focus on two groups of participants, those aged around 50 and those nearing retirement aged over 60. You determine that the 60-year-old group is indifferent between investing all of their savings either in the risk-free asset (interest rate of 5%), that might go higher or in the stock market (which you assume has a slightly lower risk premium of 6.0% and a long-term standard deviation of 19%, BUT is more Volatile with Ukraine War, interest rate and risk of recession (23%).

a. What is the expected return of the stock market? What is the Sharpe ratio of the average market? (S&P 500) And the Sharpe Client portfolio? Is this OK?

b. What is the risk aversion of 60 year-olds using long run historical market returns (10%), and long run and Rf (3%)? NOTE the changed numbers in this part of question.

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