ATTEND ONLY IF YOU CAN SOLVE ALL THE QUESTIONS TOGETHER. IF NOT I WILL REPORT YOUR ANSWER IF PARTLY ANSWERED.

Greta has 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 9% per year, with a standard deviation of 23% . The hedge fund risk premium is estimated at 11% with a standard deviation of 38% . 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.)

An 8-year maturity zero-coupon bond selling at a yield to maturity of 9% (effective annual yield) has convexity of 155.1 and modified duration of 7.06 years. A 30-year maturity 5% coupon bond making annual coupon payments also selling at a yield to maturity of 9% has nearly identical duration-7.04 years-but considerably higher convexity of 244.8. a. Suppose the yield to maturity on both bonds increases to 10%. What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule? (Input all amounts as positive values. Do not round intermediate calculations. Round your answers to 2 decimal places.) b. Suppose the yield to maturity on both bonds decreases to 8%. What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration with convexity rule? (Input all amounts as positive values. Do not round intermediate calculations. Round your answers to 2 decimal places.)