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 portfolio? Complete this question by entering your answers in the tabs below. Req A1 Req A2 Assuming the correlation between the annual returns on the two portfolios is 0.3, what would be the optimal asset allocation? Note: Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places. S&P Hedge < Req A1 Req A2 >
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 portfolio? Complete this question by entering your answers in the tabs below. Req A1 Req A2 Assuming the correlation between the annual returns on the two portfolios is 0.3, what would be the optimal asset allocation? Note: Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places. S&P Hedge < Req A1 Req A2 >
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 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 portfolio?
Complete this question by entering your answers in the tabs below.
Req A1
Req A2
Assuming the correlation between the annual returns on the two portfolios is 0.3, what would be the optimal asset allocation?
Note: Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.
S&P
Hedge
< Req A1
Req A2 >
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