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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 20% per year. Assume these values are representative of investors' expectations for future performance and that the current T-bill rate is 5%.

Calculate the utility levels of each portfolio for an investor with A = 2. Assume the utility function is U = E(r) - 0.5 x Ao2. Redo the same for an investor with A = 3. Which portfolio does each investor prefer?

Wbills Windex U(A=2) U(A=3)

0 1.0

.2   .8

.4 .6

.6. .4

.8 .2

1.0 0

The two rows of numbers are for Wbills and Windex

Math   Statistics-And-Probability   
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