Greta has risk aversion of A=4 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 8% per year, with a standard deviation of 18%. The hedge fund risk premium is estimated at 10% with a standard deviation of 33%. 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. What should be Greta's capital allocation? (Do not round your intermediate calculations. Round your answers to 2 decimal places.) S&P Hedge Risk-free asset 90.00 % 0.00 % 0.00%
Greta has risk aversion of A=4 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 8% per year, with a standard deviation of 18%. The hedge fund risk premium is estimated at 10% with a standard deviation of 33%. 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. What should be Greta's capital allocation? (Do not round your intermediate calculations. Round your answers to 2 decimal places.) S&P Hedge Risk-free asset 90.00 % 0.00 % 0.00%
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:Greta has risk aversion of A=4 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 8% per year, with a standard deviation of 18%. The hedge fund risk premium is estimated at 10% with a
standard deviation of 33%. 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.
What should be Greta's capital allocation? (Do not round your intermediate calculations. Round your answers to 2 decimal places.)
S&P
Hedge
Risk-free asset
90.00 %
0.00 %
0.00%
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