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nydimaria [60]
2 years ago
10

f your risk-aversion coefficient is A = 4 and you believe that the entire 1926–2015 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 × Aσ2. and 51.05%

Physics
1 answer:
siniylev [52]2 years ago
7 0

Answer:

The portfolio should invest 48.94% in equity while 51.05% in the T-bills.

Explanation:

As the complete question is not given here ,the table of data is missing which is as attached herewith.

From the maximized equation of the utility function it is evident that

Weight=\frac{E_M-r_f}{A\sigma_M^2}

For the equity, here as

  • Weight is percentage of the equity which is to be calculated
  • {E_M-r_f} is the Risk premium whose value as seen from the attached data for the period 1926-2015 is 8.30%
  • A is the risk aversion factor which is given as 4.
  • \sigma_M is the standard deviation of the portfolio which from the data for the period 1926-2015 is 20.59

By substituting values.

Weight=\frac{E_M-r_f}{A\sigma_M^2}\\Weight=\frac{8.30\%}{4(20.59\%)^2}\\Weight=0.4894 =48.94\%

So the weight of equity is 48.94%.

Now the weight of T bills is given as

Weight_{T-Bills}=1-Weight_{equity}\\Weight_{T-Bills}=1-0.4894\\Weight_{T-Bills}=0.5105=51.05\%\\

So  the weight of T-bills is 51.05%.

The portfolio should invest 48.94% in equity while 51.05% in the T-bills.

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