Greta has risk aversion of $A=3$ when applied to return on wealth over a $1-$year horizon. She is pondering two portfolios, the S&P $500$

and a hedge fund, as well as a number of $1-$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 $14\%.$ The hedge fund risk premium is estimated at $10\%$ with a

standard deviation of $29\%.$ 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.

Required:

a$-1.$ Assuming the correlation between the annual returns on the two portfolios is $0\mathrm{.}3,$ what would be the optimal asset allocation?

$a-2.$ What is the expected risk premium on the portfolio?