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Consider historical data showing that the average annual rate of return on the S&P 500 portfolio...

Consider historical data showing that the average annual rate of return on the S&P 500 portfolio over the past 85 years has averaged roughly 8% more than the Treasury bill return and that the S&P 500 standard deviation has been about 23% per year. Assume these values are representative of investors' expectations for future performance and that the current T-bill rate is 6%.


Calculate the utility levels of each portfolio for an investor with A = 2. Assume the utility function is U = E(r) − 0.5 × Aσ2.

Wbills WIndex U(A=2)

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 1
.2 .8
.4 .6
.6 .4
.8 .2
1.0 0
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