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Doss [256]
3 years ago
8

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

which the risky portfolio is still preferred to T-Bills? 4.11 3.97 5.04 3.09
Mathematics
1 answer:
solniwko [45]3 years ago
8 0
<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 (\sigma) = 18 %

We know that,

Specify utility by U = E(r) – 0.5A\sigma^2

U = 0.12– 0.5(A) × 0.18^2

= 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 < \dfrac{0.05}{0.0162} = 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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