The variance of the return on the market portfolio is .0400 and the expected return on the market portfolio is 20%.If the risk-free rate of return is 10%,the market degree of risk aversion,A,is _________.
A) 0.5
B) 2.5
C) 3.5
D) 5.0

Question

Quizplus · Accepted Answer

The market degree of risk aversion is calculated as the ratio of the variance of the return on the market portfolio to the square of the expected return on the market portfolio. In this case, the variance of the return on the market portfolio is .0400 and the expected return on the market portfolio is 20%. Therefore, the market degree of risk aversion is .0400 / (0.20)^2 = 2.5.

The Variance of the Return on the Market Portfolio Is