Respuesta :
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:
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%.
