1. Graph investors' long-term expected inflation rate since 2003 by subtracting from the 10-year U.S. Treasury bond yield (FRED code: GS10) the yield on 10-year Treasury Inflation-Protected Securities (FRED code: FII10). a. Do these market-based inflation expectations appear stable? Did the financial crisis of 2007-2009 affect these expectations?

1. Graph investors' long-term expected inflation rate since 2003 by subtracting from the 10-year U.S. Treasury bond yield (FRED code: GS10) the yield on 10-year Treasury Inflation-Protected Securities (FRED code: FII10). a. Do these market-based inflation expectations appear stable? Did the financial crisis of 2007-2009 affect these expectations?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 4QTD

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Refer the table below on the average excess return of the U.S. equity market and the standard deviation of that excess return. Suppose that the U.S. market is your risky portfolio. Period 1927-2021 1927-1950 1951-1974 1975-1998 1999-2021 Average Annual Returns U.S. equity 12.17 10.26 10.21 17.97 10.16 1-Month T-Bills 3.30 0.93 3.59 6.98 1.66 U.S. Excess return 8.87 9.33 6.62 10.99 8.50 Equity Market Standard Deviation 20.25 26.57 20.32 14.40 18.85 Sharpe Ratio 0.44 0.35 0.33 0.76 0.45 Required: a. If your risk-aversion coefficient is A = 4.9 and you believe that the entire 1927-2021 period is representative of future expected 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 × Ao². b. What if you believe that the 1975-1998 period is representative?
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