Question: You are asked to evaluate the common portfolio advice of a 60/40 split between stocks and bonds. Suppose the expected rate of return on equities

You are asked to evaluate the common portfolio advice of a 60/40 split between stocks and bonds. Suppose the expected rate of return on equities is 8%/year 2 and the standard deviation of the return on equities is 19%/year. T-Bills earn 1%/year (assume they are riskless).

(a) What is the implied risk aversion coeﬃcient of an investor for whom a 60/40 split is optimal?

(b) Plot the CAL along with a couple of indiﬀerence curves for the investor type identiﬁed above

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a Expected Rate of Return Er 8 008 Frisk free rate Treasury Bills U 1 001 Standard Deviation 19 019 ... View full answer

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