Historical data for the S & P 500 Index show an average excess return over Treasury bills of about 8.5 % with standard deviation of about 20 %. To the extent that these averages approximate investor expectations for the sample period, what must have been the co-efficient of risk aversion of the average investor? If the co-efficient of risk aversion were 3.5, what risk premium would have been consistent with the markets historical standard deviation?.

1. Historical data for the S & P 500 Index show an average excess return over Treasury bills of about
8.5 % with standard deviation of about 20 %. To the extent that these averages approximate
investor expectations for the sample period, what must have been the co-efficient of risk aversion
of the average investor? If the co-efficient of risk aversion were 3.5, what risk premium would have
been consistent with the markets historical standard deviation?