Question

Treasury bills are paying a 4% rate of return. A risk-averse investor with a risk aversion of A = 1.85 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:

14.656%

Step-by-step explanation:

Data provided in the question:

Rate of return, r = 4% = 0.04

Risk aversion of A = 1.85

Standard deviation, σ = 24%

Now,

we have the relation

A = (E - r) ÷ σ²

E = expected return on portfolio

r = Risk free rate

on substituting the respective values, we get

1.85 = (E - 0.04) ÷ (0.24)²

or

0.0576 × 1.85 = (E - 0.04)

or

0.10656 + 0.04 = E

or

E = 0.14656 or

E = 0.14656 × 100% = 14.656%