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Problem 6-12 Consider historical data showing that the average annual rate...

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Accounting

Problem 6-12

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 21% per year. Assume these values are representative of investors' expectations for future performance and that the current T-bill rate is 4%.

Calculate the utility levels of each portfolio for an investor with A = 3. Assume the utility function is U = E(r) 0.5 A2. (Do not round intermediate calculations. Round your answers to 4 decimal places.)

WBills

WIndex

U(A = 3)

0.2

0.8

0.4

0.6

0.0

1.0

0.8

0.2

1.0

0.0

0.6

0.4

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