Greta has risk aversion of A = 3 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 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. If the correlation coefficient between annual portfolio returns is actually 0.4, what is the covariance between the returns? Note: Round your answer to 3 decimal places. Annual covariance
Greta has risk aversion of A = 3 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 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. If the correlation coefficient between annual portfolio returns is actually 0.4, what is the covariance between the returns? Note: Round your answer to 3 decimal places. Annual covariance
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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Transcribed Image Text:Greta has risk aversion of A = 3 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 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.
If the correlation coefficient between annual portfolio returns is actually 0.4, what is the covariance between the returns?
Note: Round your answer to 3 decimal places.
Annual covariance
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