Using the information regarding risk aversion you gathered in Question 1 you decide to advise you clients to invest funds in the market portfolio and the risk-free asset. You gather historical data on NYSE stocks (the market portfolio) and determine that the average return of stocks is 11.7% and that the risk premium is 8.1%. NOTE changes. The standard deviation of stocks is 20.0%. You analyze the risk and return possibilities of a 1-year investment in the stock market and the risk-free asset.

Using the risk aversion for 50 and 60 year old groups (from Question 1 with lower SD (19%) and different Rf rates 5% or 3%), what is the optimal amount y that the two groups should invest in the risky portfolio? What are the expected rates of return and standard deviations of the two portfolios? Look at the change in Risk free rate moving from 0.5% increasing to 5.0% with inflation / recovery with Changed (Q1)/ lower risk premium of 5.0% of market portfolio for 50 year olds and historical for 60 year olds. How do the two sets of investors compare in terms of returns and allocations with different expectations (Rf and premiums)? How do older RA investors feel about returns?