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The standard deviation of market portfolio is 20%. The average risk aversion coefficient is 2. Risk...

The standard deviation of market portfolio is 20%. The average risk aversion coefficient is 2. Risk free interest rate is 5%. Calculate the expected return of market portfolio at equilibrium

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Answer #1

A = [E(r p)- rF ] /[.5*(SD) ^2 ]

2 = [E(r p) - .05 ]/[.5 * (.20)^2 ]

2 = [E(r p)- .05]/[.5*.04]

2 = [E(r p) - .05 ] /.02

2*.02 = [E(r p) -.05]

.04 = [E(r p) -.05]

.04+.05= E(r p)

E(r p) = .09 or 9%

expected return of market portfolio = 9%

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