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Norma-Jean [14]
1 year ago
6

If your risk-aversion coefficient is A = 4.4 and you believe that the entire 1926–2015 period is representative of future expect

ed performance, what fraction of your portfolio should be allocated to T-bills and what fraction to equity? Assume your utility function is U = E(r) – 0.5 × Aσ2
Business
1 answer:
tamaranim1 [39]1 year ago
8 0

Answer:

=> fraction of the portfolio that should be allocated to T-bills = 0.4482 = 44.82%.

=> fraction to equity = 0.5518 = 55.18%.

Explanation:

So, in this question or problem we are given the following parameters or data or information which are; that the utility function is U = E(r) – 0.5 × Aσ2 and the risk-aversion coefficient is A = 4.4.

The fraction of the portfolio that should be allocated to T-bills and its equivalent fraction to equity can be calculated by using the formula below;

The first step is to determine or Calculate the value of fraction to equity.

Hence, the fraction to equity = risk premium/(market standard deviation)^2 - risk aversion.

= 8.10% ÷ [(20.48%)^2 × 3.5 = 0.5518.

Therefore, the value for fraction of the portfolio that should be allocated to T-bills = 1 - fraction to equity = 1 - 0.5518 =0.4482 .

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I wish you the best.

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A stock price is currently $40. Over each of the next two three-month periods it is expected to go up by 10% or down by 10% (mea
ad-work [718]

Answer:

Explanation:

The Risk neutral probability is given by

e rt − D / U-D

U=1.1

D=0.9

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 =0.652

π d = 1− 0.652 = 0.348

The values of american and european options at each node is given in the following table.

                                    0.652  

                                                                                                    0  

                                                                0.81   48.4  

                                                                0.652    

                                                                0.81    

American option value     2.54         44    

probability                    0.652/0.3478'  

Option value                     2.12        2.4  

Futures price                        40           6      39.6  

                                                               0.3478    

                                                               4.76    

                                                                  36    

                                                                                           0.3478  

                                                                                           9.6  

                                                                                          32.4  

Time period                         0      3           6

the value at up node at 3 months is given by = ( 0.652∗ 0 ) + ( 0.3478 ∗ 2.4 )/e ∧0.12 ∗ 3 / 12 = 0.81

Hence, value of european put option =$2.12

Value of American put option = 2.54

4 0
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