A portfolio has a E[r] of 12% and a std deviation of 18%. T-Bills return 7%. What is the maximum level of risk aversion (A) for
1 answer:
<h2>The required "option D) 3.09" is correct.</h2>
Step-by-step explanation:
Given,
A portfolio has a E[r] = 12 %, and
A standard deviation () = 18 %
We know that,
Specify utility by U = E(r) – 0.5A
U = 0.12– 0.5(A) ×
= 0.12 - 0.5 × A × 0.0162
In order for the risky portfolio to be preferred to bills,
The following condition must have:
0.12 – 0.0162A > 0.07
⇒ A < = 3.09
A must be less than 3.09 for the risky portfolio to be preferred to bills.
Thus, the required "option D) 3.09" is correct.
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