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Greta has risk aversion of A = 3 when applied to return on wealth over a one - year horizon. She is pondering two portfolios,
Greta has risk aversion of A when applied to return on wealth over a oneyear horizon. She is pondering two portfolios, the S&P and a hedge fund, as well as a number of oneyear strategies. All rates are annual and continuously compounded. The S&P risk premium is estimated at per year, with a standard deviation of The hedge fund risk premium is estimated at with a standard deviation of 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 and the hedge fund return in the same year is zero, but Greta is not fully convinced by this claim.
Q
What should be Gretas capital allocation? Do not round your intermediate calculations. Round your answers to decimal places.
S&P
Hedge
Riskfree asset
Q
Calculate Gretas capital allocation using an annual correlation of Do not round your intermediate calculations. Round your answers to decimal places.
S&P
Hedge
Riskfree asset
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