Question
1- Suppose you have a project that has a 0.5 chance of tripling your investment in a year and a 0.5 chance of doubling your
1- Suppose you have a project that has a 0.5 chance of tripling your investment in a year and a 0.5 chance of doubling your investment in a year. What is the standard deviation of the rate of return on this investment?(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places.)
2- Suppose that you have $1 million and the following two opportunities from which to construct a portfolio:
- Risk-free asset earning 14% per year.
- Risky asset with expected return of 28% per year and standard deviation of 38%.
If you construct a portfolio with a standard deviation of 30%, what is its expected rate of return?(Do not round your intermediate calculations. Round your answer to 1 decimal place.)
3- Greta has risk aversion ofA= 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 4-year strategies. (All rates are annual and continuously compounded.) The S&P 500 risk premium is estimated at 9% per year, with a standard deviation of 18%. The hedge fund risk premium is estimated at 12% 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.
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.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started