An investor has a risk aversion of 5. If she wants to invest all her wealth...

 

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An investor has a risk aversion of 5. If she wants to invest all her wealth in the stock market that has a standard deviation of 18%. What is the implied risk premium of the market? What is the market risk premium if she has a risk aversion of only 2? 5. (35 pts) There are two stocks: A and B, and Treasury Bill (TB). The parameters of these securities are following: Expected Return Correlation with Stock Stock A Stock B TB 10% 15% 5% Standard Deviation 20% 25% 0% A 1 0.2 0 a (20 pts) If you need an expected return of 12% and you only have the access to the three securities above, what is your optimal portfolio composition? What is the standard deviation of your portfolio? b. (15pts) If you need an expected return of 12% and you only have the access to the two stocks above (but no access to TB), what is your portfolio composition? What is the standard deviation of your portfolio? An investor has a risk aversion of 5. If she wants to invest all her wealth in the stock market that has a standard deviation of 18%. What is the implied risk premium of the market? What is the market risk premium if she has a risk aversion of only 2? 5. (35 pts) There are two stocks: A and B, and Treasury Bill (TB). The parameters of these securities are following: Expected Return Correlation with Stock Stock A Stock B TB 10% 15% 5% Standard Deviation 20% 25% 0% A 1 0.2 0 a (20 pts) If you need an expected return of 12% and you only have the access to the three securities above, what is your optimal portfolio composition? What is the standard deviation of your portfolio? b. (15pts) If you need an expected return of 12% and you only have the access to the two stocks above (but no access to TB), what is your portfolio composition? What is the standard deviation of your portfolio?

Answer rating: 100% (QA)

To calculate the implied risk premium of the market we can use the formula Implied Risk ... View the full answer