Greta, an elderly investor, has a degree of risk aversion of A= 3 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at 6.6% per year, with a SD of 21.6%. The hedge fund risk premium is estimated at 11.6% with a SD of 36.6%. The returns on both of these portfolios in any particular year are uncorrelated with its own returns in other years. They are also uncorrelated with the returns of the other portfolio in other years. The hedge fund claims the correlation coefficient between the annual returns on the S&P 500 and the hedge fund in the same year is zero, but Greta is not fully convinced by this claim. What should be Greta's capital allocation? (Do not round your intermediate calculations. Round your answers to 2 decimal places.) S&P %

Greta, an elderly investor, has a degree of risk aversion of A= 3 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at 6.6% per year, with a SD of 21.6%. The hedge fund risk premium is estimated at 11.6% with a SD of 36.6%. The returns on both of these portfolios in any particular year are uncorrelated with its own returns in other years. They are also uncorrelated with the returns of the other portfolio in other years. The hedge fund claims the correlation coefficient between the annual returns on the S&P 500 and the hedge fund in the same year is zero, but Greta is not fully convinced by this claim. What should be Greta's capital allocation? (Do not round your intermediate calculations. Round your answers to 2 decimal places.) S&P %

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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The following information applies to Problems 22 through 27: Greta has risk aversion of A = 3 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (All rates are annual and continu- ously compounded.) The S&P 500 risk premium is estimated at 5% per year, with a standard devia- tion of 20%. The hedge fund risk premium is estimated at 10% with a standard deviation of 35%. The returns on both of these portfolios in any particular year are uncorrelated with its own returns in other years. They are also uncorrelated with the returns of the other portfolio in other years. The hedge fund claims the correlation coefficient between the annual return on the S&P 500 and the hedge fund return in the same year is zero, but Greta is not fully convinced by this claim. 22. Compute the estimated annual risk premiums, standard deviations, and Sharpe ratios for the two portfolios. 23. Assuming…
Greta has risk aversion of A = 3 when applied to return on wealth over a 1-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of 1-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at 9% per year, with a standard deviation of 17%. The hedge fund risk premium is estimated at 11% with a standard deviation of 32%. The returns on both of these portfolios in any particular year are uncorrelated with its own returns in other years. They are also uncorrelated with the returns of the other portfolio in other years. The hedge fund claims the correlation coefficient between the annual return on the S&P 500 and the hedge fund return in the same year is zero, but Greta is not fully convinced by this claim. Required: a-1. Assuming the correlation between the annual returns on the two portfolios is 0.3, what would be the optimal asset allocation? a-2. What is the expected risk premium on the…
A 280.
Greta has risk aversion of A= 5 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of 1-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at 9% per year, with a standard deviation of 17%. The hedge fund risk premium is estimated at 11% with a standard deviation of 32%. The returns on both of these portfolios in any particular year are uncorrelated with its own returns in other years. They are also uncorrelated with the returns of the other portfolio in other years. The hedge fund claims the correlation coefficient between the annual return on the S&P 500 and the hedge fund return in the same year is zero, but Greta is not fully convinced by this claim. a-1. Assuming the correlation between the annual returns on the two portfolios is indeed zero, what would be the optimal asset allocation? (Do not round intermediate calculations. Enter your…
Alecia is a financial investor who actively buys and sells in thesecurities market. Now she has a portfolio of all blue chips, including: $13 500of Share A, $7600 of Share B, $14 700 of Share C, and $5 500 of Share D.Required:a) Compute the weights of the assets in Rachel’s portfolio?b) Following is forecast for economic situation and Alecia’s portfolio returnsnext year, calculate the expected return, variance and standard deviationof the portfolio.State of economy Probability Rate of returnsMild Recession 0.35 - 5%Growth 0.45 15%Strong Growth 0.20 30%
Manshukh
Greta has risk aversion of A = 5 and a 1-year investment horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of 1-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at 7% per year, with a standard deviation of 19%. The hedge fund risk premium is estimated at 11% with a standard deviation of 34%. The returns on both of these portfolios in any particular year are uncorrelated with its own returns in other years. They are also uncorrelated with the returns of the other portfolio in other years. The hedge fund claims the correlation coefficient between the annual return on the S&P 500 and the hedge fund return in the same year is zero, but Greta is not fully convinced by this claim. What should be Greta's capital allocation? Note: Do not round your intermediate calculations. Round your answers to 2 decimal places. S&P Hedge Risk-free asset % % %
Greta has risk aversion of A = 5 and a 1-year investment horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of 1-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at 7% per year, with a standard deviation of 19%. The hedge fund risk premium is estimated at 11% with a standard deviation of 34%. The returns on both of these portfolios in any particular year are uncorrelated with its own returns in other years. They are also uncorrelated with the returns of the other portfolio in other years. The hedge fund claims the correlation coefficient between the annual return on the S&P 500 and the hedge fund return in the same year is zero, but Greta is not fully convinced by this claim. Calculate Greta's capital allocation using an annual correlation of 0.3. Note: Do not round your intermediate calculations. Round your answers to 2 decimal places. S&P Hedge % % Risk-free asset %
Greta has risk aversion of A = 5 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the TSX/S&P Composite Index and a hedge fund, as well as a number of one-year strategies. (All rates are annual and continuously compounded.) The TSX/S&P Composite Index risk premium is estimated at 10% per year, with a standard deviation of 16%. The hedge fund risk premium is estimated at 8% with a standard deviation of 26%. The returns on both of these portfolios in any particular year are uncorrelated with its own returns in other years. They are also uncorrelated with the returns of the other portfolio in other years. The hedge fund claims the correlation coefficient between the annual return on the TSX/S&P Composite Index and the hedge fund return in the same year is zero, but Greta is not fully convinced by this claim. a-1. Assuming the correlation between the annual returns on the two portfolios is 0.3, what would be the optimal asset allocation? (Do not…
Greta, an elderly investor, has a degree of risk aversion of A = 3 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at 5% per year, with a SD of 20%. The hedge fund risk premium is estimated at 10% with a SD of 35%. The returns on both of these portfolios in any particular year are uncorrelated with its own returns in other years. They are also uncorrelated with the returns of the other portfolio in other years. The hedge fund claims the correlation coefficient between the annual return on the S&P 500 and the hedge fund return in the same year is zero, but Greta is not fully convinced by this claim.What should be Greta’s capital allocation?
Greta has risk aversion of A = 4 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at 5% per year, with a standard deviation of 17%. The hedge fund risk premium is estimated at 10% with a standard deviation of 32%. The returns on both of these portfolios in any particular year are uncorrelated with its own returns in other years. They are also uncorrelated with the returns of the other portfolio in other years. The hedge fund claims the correlation coefficient between the annual return on the S&P 500 and the hedge fund return in the same year is zero, but Greta is not fully convinced by this claim. If the correlation coefficient between annual portfolio returns is actually 0.3, what is the covariance between the returns?
Mr. Devine is a fixed-income portfolio manager. He forecast a cash outflow of $10 million in June and plans to sell his baseline bond portfolio. The fund currently is worth $10 million, has an “A” quality rating, duration of 7 years, weighted average maturity of 15 years, annual coupon rate of 10.25%, and YTM of 10.25% (note: the fund is selling at its par value). Suppose Mr. Devine is afraid that long-term interest rates could increase and decides to hedge his June sale by taking a position in June T-bond futures contracts when the June T-bond contract is trading at 80-16, and the T-bond most likely to be delivered on the contract has a YTM of 9.5%, maturity of 15 years, and a duration of 9 years （1）Using the price-sensitivity model, show how Mr. Devine could hedge his June bond portfolio sale against interest rate risk. （2）Suppose long-term interest rates increase over the period such that at the June expiration, Mr. Devine’s baseline portfolio (A-rated, 10.25% coupon rate, 15-year…

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