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 5-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at 10% per year, with a standard deviation of 16%. The hedge fund risk premium is estimated at 12% with a standard deviation of 31%. 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. Compute the estimated 1-year risk premiums, standard deviations, and Sharpe ratios for the two portfolios. (Do not round your intermediate calculations. Round "Sharpe ratios" to 4 decimal places and other answers to 2 decimal places.)
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 5-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at 10% per year, with a standard deviation of 16%. The hedge fund risk premium is estimated at 12% with a standard deviation of 31%. 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. Compute the estimated 1-year risk premiums, standard deviations, and Sharpe ratios for the two portfolios. (Do not round your intermediate calculations. Round "Sharpe ratios" to 4 decimal places and other answers to 2 decimal places.)
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
Related questions
Question
100%
Just need help finding the Sharpe Ratios.
Transcribed Image Text:Horizon period in years:
1
Risk Aversion
5
S&P risk premium
0.1
S&P standard dev.
0.16
Hedge fund risk premium
0.12
Hedge fund standard dev.
0.31
Optimal Risky Portfolio of Horizon Period
Correlation between funds
Assets
Standard dev. risk prem.
S&P
0.16
0.1
Hedge fund
0.2683281573
1.100341658
Computed values
Standard dev of optimal risky portfolio
0.8579857206
proportion of S&P in optimal portfolio
0.2035695558
proportion of hedge fund in optimal portfoll 0.7964304442
Expected return of optimal portfolio
0.8967025507
Sharpe ratio
0.2436229967
Capital Allocation
S&P
0.0495942252
Hedge Fund
0.1940287714
Risk free assets
0.7563770033
Transcribed Image Text: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 5-year strategies. (All rates are annual and
continuously compounded.) The S&P 500 risk premium is estimated at 10% per year, with a standard deviation of 16%.
The hedge fund risk premium is estimated at 12% with a standard deviation of 31%. 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.
Compute the estimated 1-year risk premiums, standard deviations, and Sharpe ratios for the two portfolios. (Do not
round your intermediate calculations. Round "Sharpe ratios" to 4 decimal places and other answers to 2 decimal
places.)
x Answer is not complete.
Hedge Fund
Portfolio
S&P Portfolio
Risk premiums
0.10
0.12
Standard deviations
0.16
0.31
Sharpe ratios
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education