not use ai please 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, aswell as a number of 1-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at6% 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 alsouncorrelated with the returns of the other portfolio in other years. The hedge fund claims the correlation coefficient between the annualreturn 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 indeed zero, what would be the optimal assetallocation?a-2. What is the expected risk premium on the portfolio?

Explanation; To determine the optimal asset allocation for Greta, we need to consider her risk…

Answered: Greta has risk aversion of A = 5 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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