Problem 7-22 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 6% 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 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.) Risk premiums Standard deviations Sharpe ratios S&P Portfolio Hedge Fund Portfolio
Problem 7-22 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 6% 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 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.) Risk premiums Standard deviations Sharpe ratios S&P Portfolio Hedge Fund Portfolio
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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Transcribed Image Text:Problem 7-22
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 6% 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 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.)
Risk premiums
Standard deviations
Sharpe ratios
S&P Portfolio
Hedge Fund
Portfolio
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