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 8.2% per year, with a SD of 23.2%. The hedge fund risk premium is estimated at 13.2% with a SD of 38.2%. 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. Calculate Greta's capital allocation using an annual correlation of 0.3. (Do not round your intermediate calculations. Round your answers to 2 decimal places.) S&P % Hedge % Risk-free asset %
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 8.2% per year, with a SD of 23.2%. The hedge fund risk premium is estimated at 13.2% with a SD of 38.2%. 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. Calculate Greta's capital allocation using an annual correlation of 0.3. (Do not round your intermediate calculations. Round your answers to 2 decimal places.) S&P % Hedge % Risk-free asset %
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
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Transcribed Image Text: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 8.2% per year, with a SD of 23.2%. The hedge fund risk
premium is estimated at 13.2% with a SD of 38.2%. 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.
Calculate Greta's capital allocation using an annual correlation of 0.3. (Do not round your intermediate calculations. Round your
answers to 2 decimal places.)
S&P
Hedge
Risk-free asset
%
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