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 continuously compounded.) The S&P 500 risk premium is estimated at 6% per year, with a standard deviation of 18%. The hedge fund risk premium is estimated at 8% with a standard deviation of 33%. 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? (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 = 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% per year, with a standard deviation of 18%. The hedge fund risk premium is estimated at 8% with a standard deviation of 33%. 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? (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

Problem 1PS

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Raghubhai
A fund manager owns a portfolio of 10 stocks. Explain how the manager can reduce the systematic risk of his portfolio by 10% over the next year using futures. Will the expected return on the manager’s portfolio also drop by 10%? Is it possible for the manager to perfectly hedge his exposure to equity risk? Explain your answers.
In addition to risk-free securities, you are currently invested in the TanglewoodFund, a broad-based fund of stocks and other securities with an expected return of 14% and a volatility of 24%. Currently, the risk-free rate of interest is 3%. Your broker suggests that you add a venture capital fund to your current portfolio. The venture capital fund has an expected return of 20%, a volatility of 79 %, and a correlation of 0.2 with the Tanglewood Fund. Assume you follow your broker's advice and put 50% of your money in the venture fund: a. What is the Sharpe ratio of the Tanglewood Fund? Answer (Already calculated): Sharpe ratio of the Tanglewood Fund is: 0.458 b. What is the Sharpe ratio of your new portfolio? c. What is the optimal Sharpe ratio you can obtain by investing in the venturefund? (Hint: Use Excel and round your answer to three decimal places.) Please use excel for last question, four people from chegg has gotten this question wrong. Please get it right
A 280.
You are considering investing in a mutual fund. The fund is expected to earn a return of 12 percent in the next year. If its annual return is normally distributed with a standard deviation of 4.50 percent, what return can you expect the fund to beat 95 percent of the time? what is the expected return(%)?
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…
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…
A mutual fund manager has a $20 million portfolio with a beta of 0.75. The risk-free rate is 3.75%, and the market risk premium is 7.0%. The manager expects to receive an additional $5 million, which she plans to invest in a number of stocks. After investing the additional funds, she wants the fund's required return to be 12%. What should be the average beta of the new stocks added to the portfolio? Negative value, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.
Your portfolio allocates equal funds to DW Company and Woodpecker, Incorporated. DW Company stock has an annual return mean and standard deviation of 15.5 percent and 44 percent, respectively. Woodpecker stock has an annual return mean and standard deviation of 12.6 percent and 44 percent, respectively. The return correlation between DW and Woodpecker is zero. What is the smallest expected loss for your portfolio in the coming month with a probability of 16 percent? Note: A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round the z-score value to 3 decimal places when calculating your answer. Enter your answer as a percent rounded to 2 decimal places. X Answer is complete but not entirely correct. Smallest expected loss -20.43 × %
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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