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Problem 7-27 Greta, an elderly investor, has a degree of risk aversion of A = 3 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 one-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at 6% per year, with a SD of 21%. The hedge fund risk premium is estimated at 11% with a SD of 36%. 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 returns on the S&P 500 and the hedge fund 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. (Do not round your intermediate calculations. Round your answers to 2 decimal places.) Answer is complete but not entirely correct. S&P 45.35 X % Hedge 28.29 X % Risk-free 26.36 X % asset

Problem 7-27 Greta, an elderly investor, has a degree of risk aversion of A = 3 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 one-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at 6% per year, with a SD of 21%. The hedge fund risk premium is estimated at 11% with a SD of 36%. 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 returns on the S&P 500 and the hedge fund 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. (Do not round your intermediate calculations. Round your answers to 2 decimal places.) Answer is complete but not entirely correct. S&P 45.35 X % Hedge 28.29 X % Risk-free 26.36 X % asset

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Problem 7-27 Greta, an elderly investor, has a degree of risk aversion of A= 3 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 one-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at 6% per year, with a SD of 21%. The hedge fund risk premium is estimated at 11% with a SD of 36%. 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 returns on the S&P 500 and the hedge fund 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. (Do not round your intermediate calculations. Round your answers to 2 decimal places.) Answer is complete but not entirely correct. S&P 45.35 X % Hedge 28.29 X % Risk-free 26.36 X % asset
Transcribed Image Text:Problem 7-27 Greta, an elderly investor, has a degree of risk aversion of A= 3 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 one-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at 6% per year, with a SD of 21%. The hedge fund risk premium is estimated at 11% with a SD of 36%. 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 returns on the S&P 500 and the hedge fund 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. (Do not round your intermediate calculations. Round your answers to 2 decimal places.) Answer is complete but not entirely correct. S&P 45.35 X % Hedge 28.29 X % Risk-free 26.36 X % asset
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