Given
Risk-free rate (T-bill) = 5% = 0.05
S&P 500 expected return = 5% + 8% = 13% = 0.13
S&P standard deviation = 20% = 0.20
T-bill standard deviation = 0
rf <- 0.05
rm <- 0.13
sigma_m <- 0.20
w_bills <- c(0,0.2,0.4,0.6,0.8,1)
w_index <- 1 - w_bills
expected_return <- w_bills*rf + w_index*rm
variance <- (w_index^2)*(sigma_m^2)
data.frame(w_bills, w_index, expected_return, variance)
## w_bills w_index expected_return variance
## 1 0.0 1.0 0.130 0.0400
## 2 0.2 0.8 0.114 0.0256
## 3 0.4 0.6 0.098 0.0144
## 4 0.6 0.4 0.082 0.0064
## 5 0.8 0.2 0.066 0.0016
## 6 1.0 0.0 0.050 0.0000
A <- 2
utility <- expected_return - 0.5*A*variance
data.frame(w_bills, w_index, expected_return, variance, utility)
## w_bills w_index expected_return variance utility
## 1 0.0 1.0 0.130 0.0400 0.0900
## 2 0.2 0.8 0.114 0.0256 0.0884
## 3 0.4 0.6 0.098 0.0144 0.0836
## 4 0.6 0.4 0.082 0.0064 0.0756
## 5 0.8 0.2 0.066 0.0016 0.0644
## 6 1.0 0.0 0.050 0.0000 0.0500
A <- 3
utility <- expected_return - 0.5*A*variance
data.frame(w_bills, w_index, expected_return, variance, utility)
## w_bills w_index expected_return variance utility
## 1 0.0 1.0 0.130 0.0400 0.0700
## 2 0.2 0.8 0.114 0.0256 0.0756
## 3 0.4 0.6 0.098 0.0144 0.0764
## 4 0.6 0.4 0.082 0.0064 0.0724
## 5 0.8 0.2 0.066 0.0016 0.0636
## 6 1.0 0.0 0.050 0.0000 0.0500
A <- 4
E <- c(0.12,0.15,0.21,0.24)
sigma <- c(0.30,0.50,0.16,0.21)
utility <- E - 0.5*A*(sigma^2)
data.frame(investment=1:4,E,sigma,utility)
## investment E sigma utility
## 1 1 0.12 0.30 -0.0600
## 2 2 0.15 0.50 -0.3500
## 3 3 0.21 0.16 0.1588
## 4 4 0.24 0.21 0.1518