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Chapter 6_Excel Exercises

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16 views9 pages

Chapter 6_Excel Exercises

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Uploaded by

Иван Иванов
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© © All Rights Reserved
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Draw the indifference curve in the expected return-standard deviation plane corresponding to a utility

(Hint: Choose several possible standard deviation ranging from 0 to 0.25 and find the expected return

Utility LeveRisk Aversion(3Standard Deviation Expected Return


0.02 3 0.00 2.00%
0.02 3 0.05 2.38%
0.02 3 0.10 3.50%
0.02 3 0.15 5.38%
0.02 3 0.20 8.00%
0.02 3 0.25 11.38%
ne corresponding to a utility level of 0.02 for an investor with a risk aversion of coefficient of 3.
and find the expected return providing a utility level of 0.02. Then plot the expected return and standard deviat

ed Return U E r   0.5 A 2

Chart Title
12.00% 11.38%

10.00%

8.00%
8.00%

6.00% 5.38%

4.00% 3.50%
2.38%
2.00%
2.00%

0.00%
0.00 0.05 0.10 0.15 0.20 0.25 0.30
turn and standard deviation.)
Consider historical data showing that average annual rate of return on the S&P500 portfolio over th
values are representativ

a. Calculate the expected return and variance of portfolios invested in T-bills and the S&P 500 index w

Wbills Windex Portfolio Return


a=2 0 1 13.0%
0.2 0.8 11.4%
1=3 0.4 0.6 9.8%
0.6 0.4 8.2%
1=10 0.8 0.2 6.6%
1 0 5.0%

b. Calculate the utility levels of each portfolio for an investor A=2. What do you conclude?

Utility Risk Averse (A=2) Portfolio Return


9.00% 2 13.0%
8.84% 2 11.4%
8.36% 2 9.8%
7.56% 2 8.2%
6.44% 2 6.6%
5.00% 2 5.0%

b. Calculate the utility levels of each portfolio for an investor A=3. What do you conclude?

Utility Risk Averse (A=3) Portfolio Return


8.8% 3 13.0%
8.4% 3 11.4%
7.6% 3 9.8%
6.4% 3 8.2%
5.0% 3 6.6%
- 3 5.0%
turn on the S&P500 portfolio over the past 90 years has averaged roughly 8% more than the Treasury bill retur
values are representative of investors' expectations for future performance and that the current T-b

d in T-bills and the S&P 500 index with weights as follows:

Portfolio Standard Deviatio Portfolios T-bills Return


20% I S&P500 Return
16% II S&P500 Standard Deviation
12% III
8% IV
4% V
0% VI

What do you conclude?

Portfolio Standard Deviation


20%
16%
12%
8%
4%
0%

What do you conclude?

Portfolio Standard Deviation


20%
16%
12%
8%
4%
0%
the Treasury bill return and that the S&P500 strandard deviation has been about 20% per year. Assume these
nd that the current T-bill rate is 5%.

5%
13%
20%
0% per year. Assume these
Utility Formula Data
Investment Expected ReturnStandard DeviationUtility
1 12% 0.3 -6.00%
2 15% 0.5 -35.00%
3 21% 0.16 15.88% choose that for a) as it gives the highes
4 24% 0.21 15.18% b) as it has the highest expected return

a. Which investment will you choose if you are risk averse with A=4?
b. Which investment will you choose if you are risk-neutral?

Solution

Utility
Risk-lover A=-1
16.5%
27.5%
for a) as it gives the highest uti 22.3%
the highest expected return 26.2%

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