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Greta has risk aversion of A=3 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 8% per year, with a standard deviation of 23%. The hedge fund risk premium is estimated at 10% with a standard deviation of 40%. 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. Assuming the correlation between the annual returns on the two portfolios is 0.3, What should be Greta's capital allocation? (Do not round intermediate calculations. Enter your answer as percentage rounded to 2 decimals.) Greta's capital allocation %

Greta has risk aversion of A=3 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 8% per year, with a standard deviation of 23%. The hedge fund risk premium is estimated at 10% with a standard deviation of 40%. 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. Assuming the correlation between the annual returns on the two portfolios is 0.3, What should be Greta's capital allocation? (Do not round intermediate calculations. Enter your answer as percentage rounded to 2 decimals.) Greta's capital allocation %

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Greta has risk aversion of A = 3 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 8% per year, with a standard deviation of 23%. The hedge fund risk premium is estimated at 10% with a standard deviation of 40%. 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. Assuming the correlation between the annual returns on the two portfolios is 0.3, What should be Greta's capital allocation? (Do not round intermediate calculations. Enter your answer as percentage rounded to 2 decimals.) Greta's capital allocation %
Transcribed Image Text:Greta has risk aversion of A = 3 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 8% per year, with a standard deviation of 23%. The hedge fund risk premium is estimated at 10% with a standard deviation of 40%. 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. Assuming the correlation between the annual returns on the two portfolios is 0.3, What should be Greta's capital allocation? (Do not round intermediate calculations. Enter your answer as percentage rounded to 2 decimals.) Greta's capital allocation %
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