We have provided with the following information

You are given $10,000 in cash to invest in a portfolio consisting of a broad stock index fund P, and a portfolio of T-bills, F.

The expected return on the stock index is 18%, with a standard deviation of 20%,

The return on the T-bill portfolio will be 8%.

You can borrow at a fixed rate of 10% as long as you don’t borrow more than $5,000. If you need to borrow more, the lending rate becomes 12%.

a)How large is the risk premium?

Risk premium = E(rrisky) – rT-bil

E(rrisky)= 18 %

rT-bil = 10%

lRisk premium= 18% – 8%

= 10%

Answer : The risk premium is 8%

b)What are the “reward-to-variability” ratios when y ≤ 1, 1<y ≤ 1.5, and y > 1.5?

y≤1

:.1/.2 = .5

1≤y≤1.5:

(.18-.1)/.2 = .4

y>1.5:

(.18-.12)/.2 = .3

We have provided with the following information

You are given $10,000 in cash to invest in a portfolio consisting of a broad stock index fund P, and a portfolio of T-bills, F.

The expected return on the stock index is 18%, with a standard deviation of 20%,

The return on the T-bill portfolio will be 8%.

You can borrow at a fixed rate of 10% as long as you don’t borrow more than $5,000. If you need to borrow more, the lending rate becomes 12%.

a)How large is the risk premium?

Risk premium = E(rrisky) – rT-bil

E(rrisky)= 18 %

rT-bil = 10%

lRisk premium= 18% – 8%

= 10%

Answer : The risk premium is 8%

b)What are the “reward-to-variability” ratios when y ≤ 1, 1<y ≤ 1.5, and y > 1.5?

y≤1

:.1/.2 = .5

1≤y≤1.5:

(.18-.1)/.2 = .4

y>1.5:

(.18-.12)/.2 = .3