Question

Treasury bills are paying a 4% rate of return. A risk-averse investor with a risk aversion of A = 3 should invest entirely in a risky portfolio with a standard deviation of 24% only if the risky portfolio's expected return is at least ______.

Answer 1

Answer:

Answer is 12.64%. Therefore,

Treasury bills are paying a 4% rate of return. A risk-averse investor with a risk aversion of A = 3 should invest entirely in a risky portfolio with a standard deviation of 24% only if the risky portfolio's expected return is at least 12.64%.

Refer below for the explanation.

Explanation:

E - 4%= 0.5(3)(24%)2

E=12.64%

Answer 2

Answer:

21.28%

Explanation:

This can be calculated using the risk aversion formula as follows:

A = (R – r) ÷ SD^2 ……………………………… (1)

Where;

A = risk aversion rate = 3

R = Portfolio’s expected return = ?

r = Treasury bills rate of return = 4%, or 0.04

SD^2 = Square of portfolio’s standard deviation = (24%)^2, or 0.24^2 = 0.0576

Substituting the values into equation (1) and solve for R, we have:

3 = (R – 0.04) ÷ 0.056

R – 0.04 = 3 × 0.056

R = 0.1728 + 0.04 = 0.2128, or 21.28%.

Therefore, the risky portfolio's expected return is at least 21.28%.