Final answer:
The maximum level of risk aversion for which the risky portfolio is still preferred over risk-free T-bills is approximately 1.04, given the portfolio's expected rate of return is 9% and a standard deviation of 26%, with T-bills offering a risk-free 2% rate of return.
Step-by-step explanation:
To calculate the maximum level of risk aversion for which a risky portfolio is still preferred over T-bills, we can use the portfolio choice model, which involves the expected rate of return, the risk-free rate of return, and the standard deviation of the portfolio's return. The formula used to find the maximum level of risk aversion (A) where the investor would still prefer the risky portfolio is given by:
A = (E(Rp) - Rf) / (Standard Deviation of Portfolio return)^2
Where:
- E(Rp) is the expected rate of return on the portfolio, which is 9% or 0.09.
- Rf is the risk-free rate of return, which is 2% or 0.02.
- The standard deviation of the portfolio's return is 26%, or 0.26.
Substituting in the values we get:
A = (0.09 - 0.02) / (0.26)^2
Calculating this we have:
A = 0.07 / 0.0676
A = 1.035
Therefore, the maximum level of risk aversion for which the risky portfolio is still preferred over T-bills is approximately 1.04, rounded to two decimal places.