Explanation

The optimal risk aversion coefficient (λ) can be calculated using the formula:

$\lambda = \frac{IR}{2 \times TE}$

Where:

• IR = Information Ratio = 0.8
• TE = Tracking Error = 12% = 0.12

Substituting the values:

$\lambda = \frac{0.8}{2 \times 0.12} = \frac{0.8}{0.24} = 0.067$

Therefore, the optimal risk aversion coefficient is 0.067, which corresponds to option B.

Key Points:

• The optimal risk aversion coefficient balances the trade-off between risk and return
• Higher IR indicates better risk-adjusted performance
• Higher TE indicates greater deviation from the benchmark
• The formula shows that optimal risk aversion decreases with higher tracking error and increases with higher information ratio