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Use the following table to answer the question below. Expected ret. std. dev. S&P500 18% 19%...

Use the following table to answer the question below. Expected ret. std. dev. S&P500 18% 19% T-bill 3% 0% What is the level of risk aversion that will make an investor neither borrow nor lend? Assume that the lending rate equals the T-bill rate. Round your answer to 2 decimal places.

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Answer #1

Expected return of S&P 500 Risky portfolio =   18%  
standard deviation=   19%  
Risk free rate=   3%  


we need to Calculate level of risk aversion that will make an investor neither borrow nor lend. it means 100% Invested in Risky portfolio      


Formula for investment in risky portfolio      
Weight of ORP = ( Expected retun of Risky portfolio - Risk free rate)/(risk aversion coefficiennt * Std. dev. of ORP ^2)      
100 % = (18%-3%)/(A*(19%)^2)      
(A*(19%)^2)=. 15%/100%      
A =0.15/(0.19)^2      
A   4.155124654  
      

So Risk aversion Coefficient should be 4.16

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