Question

In this question, you are asked to evaluate the common portfolio advice of a 60/40 split between stocks and bonds. Suppose the expected rate of return on equities is 8%/year

2 and the standard deviation of the return on equities is 19%/year. T-Bills earn 1%/year (assume they are riskless).

(a) What is the implied risk aversion coefficient of an investor for whom a 60/40 split is optimal?

(b) Plot the CAL along with a couple of indifference curves for the investor type identified above.

Answer 1