Problem:
Assume that the expected return on stocks is 12%, the standard deviation of stocks is 18%, and the riskfree rate is 5%. Given this information, an investor selects a portfolio with a 70% allocation to stocks and a 30% allocation to the riskfree asset. According to the derivation of risk tolerance found in Equation (17.2),
Required:
Question: What risk tolerance is indicated by this choice? In words, describe what this value means.
Note: Please show how you came up with the solution.