EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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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 one-year strategies. (All rates are annual and continuously compounded.) The S&P 500
risk premium is estimated at 7% per year, with a standard deviation of 19%. The hedge fund risk premium is estimated at 9% with a
standard deviation of 34%. 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.
If the correlation coefficient between annual portfolio returns is actually 0.3, what is the covariance between the returns? (Round your
answer to 3 decimal places.)
Annual covariance
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