Refer the table below on the average excess return of the U.S. equity market and the...

Transcribed Image Text:

Refer the table below on the average excess return of the U.S. equity market and the standard deviation of that excess return. Suppose that the U.S. market is your risky portfolio. Average Annual U.S. Equity Market Returns U.S. Period equity 1-Month Excess T-Bills return Standard Deviation Sharpe Ratio 1927-2021 12.17 3.30 8.87 20.25 0.44 1927-1950 10.26 0.93 9.33 26.57 0.35 1951-1974 10.21 3.59 6.62 20.32 0.33 1975-1998 1999-2021 17.97 6.98 10.99 14.40 0.76 10.16 1.66 8.50 18.85 0.45 Required: a. If your risk-aversion coefficient is A = 3.7 and you believe that the entire 1927-2021 period is representative of future expected performance, what fraction of your portfolio should be allocated to T-bills and what fraction to equity? Assume your utility function is U= E() -0.5 Ao . b. What if you believe that the 1975-1998 period is representative? Complete this question by entering your answers in the tabs below. Required A Required B If your risk-aversion coefficient is A = 3.7 and you believe that the entire 1927-2021 period is representative of future expected performance, what fraction of your portfolio should be allocated to T-bills and what fraction to equity? Assume your utility function is U = E(r) - 0.5 Ao. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. T-bills Equity % % < Required A Required B > Show less Refer the table below on the average excess return of the U.S. equity market and the standard deviation of that excess return. Suppose that the U.S. market is your risky portfolio. Average Annual U.S. Equity Market Returns U.S. Period equity 1-Month Excess T-Bills return Standard Deviation Sharpe Ratio 1927-2021 12.17 3.30 8.87 20.25 0.44 1927-1950 10.26 0.93 9.33 26.57 0.35 1951-1974 10.21 3.59 6.62 20.32 0.33 1975-1998 1999-2021 17.97 6.98 10.99 14.40 0.76 10.16 1.66 8.50 18.85 0.45 Required: a. If your risk-aversion coefficient is A = 3.7 and you believe that the entire 1927-2021 period is representative of future expected performance, what fraction of your portfolio should be allocated to T-bills and what fraction to equity? Assume your utility function is U= E() -0.5 Ao . b. What if you believe that the 1975-1998 period is representative? Complete this question by entering your answers in the tabs below. Required A Required B If your risk-aversion coefficient is A = 3.7 and you believe that the entire 1927-2021 period is representative of future expected performance, what fraction of your portfolio should be allocated to T-bills and what fraction to equity? Assume your utility function is U = E(r) - 0.5 Ao. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. T-bills Equity % % < Required A Required B > Show less