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The historical average annual rate of return on the SP/TSX Composite Index has averaged approximately 6.3% more than the Treasury bill return, and...
The historical average annual rate of return on the S&P/TSX Composite Index has averaged approximately 6.3% more than the Treasury bill return, and its standard deviation was 16.42% per year. Assume that these values are representative of investor's expectations for future performance and that the current T-bill rate is 4%.
a) Calculate the expected return and standard deviation of portfolios invested in T-bills and the S&P/TSX Composite Index with weights as follows: (6 marks)
Portfolio A 100% T-bills; 0% Index
Portfolio B 80% T-bills; 20% Index
Portfolio C 60% T-bills; 40% Index
Portfolio D 40% T-bills; 60% Index
Portfolio E 20% T-bills; 80% Index
Portfolio F 0% T-bills; 100% Index
b) Calculate the utility levels for each portfolio calculated above, for an investor with a degree of risk aversion of A=3. (6 marks)
c) Repeat the calculation in part (b) for an investor with A=5. (6 marks)
d) What are your conclusions? (2 marks)