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Answer: 0.067
## 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
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He uses the concept of the optimal risk aversion coefficient to balance the trade-off between risk and return. Over the past year, John's portfolio achieved an Information Ratio (IR) of 0.8, and the Tracking Error (TE) relative to the benchmark was 12%. What is the optimal risk aversion coefficient for John's portfolio?
A
0.033
B
0.067
C
0.133
D
0.267
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