Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Greta, an elderly investor, has a degree of risk aversion of A 3 when applied to return on wealth over a 3- year horizon. She
Greta, an elderly investor, has a degree of risk aversion of A 3 when applied to return on wealth over a 3- year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of 3-year strategies. (All rates are annual, continuously compounded.) The S&P 500 risk premium is estimated at 8% per year, with a SD of 23%. The hedge fund risk premium is estimated at 10% with a SD of 40%. The return on each of these portfolios in any year is uncorrelated with its return or the return of any other portfolio in any other year. The hedge fund management 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 believes this is far from certain. a-1. Assuming the correlation between the annual returns on the two portfolios is indeed zero, what would be the optimal asset allocation? (Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the "%" sign in your response.) S&P Hedge a-2. What is the expected return on the portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) Expected return 0% a-3. What should be Greta's capital allocation? (Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the "%" sign in your response.) S&P Hedge Risk-free asset Greta, an elderly investor, has a degree of risk aversion of A 3 when applied to return on wealth over a 3- year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of 3-year strategies. (All rates are annual, continuously compounded.) The S&P 500 risk premium is estimated at 8% per year, with a SD of 23%. The hedge fund risk premium is estimated at 10% with a SD of 40%. The return on each of these portfolios in any year is uncorrelated with its return or the return of any other portfolio in any other year. The hedge fund management 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 believes this is far from certain. a-1. Assuming the correlation between the annual returns on the two portfolios is indeed zero, what would be the optimal asset allocation? (Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the "%" sign in your response.) S&P Hedge a-2. What is the expected return on the portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) Expected return 0% a-3. What should be Greta's capital allocation? (Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the "%" sign in your response.) S&P Hedge Risk-free asset
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