Greta has risk aversion of A = 4 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 andcontinuously compounded.) The S&P 500 risk premium is estimated at 9% per year, with a standard deviation of 18 %. The hedge fund risk premium is estimated at 12% 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 hedgefund 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.

The expected return of a portfolio is the weighted average of the expected returns of its individual…

Answered: Greta has risk aversion of A = 4 and a…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 5P

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