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Gretahas risk aversion of A=5 when applied to return on wealth over a one-year horizon. She is pondering wo portios, the s&P 500 and a
Gretahas risk aversion of A=5 when applied to return on wealth over a one-year horizon. She is pondering wo portios, 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 5&P00 risk premium is estimated at 9% per year, with a standard deviation of 17%. The hedge fund risk premium is estimated at 11% with a standard deviation of 32%. The returns on both of these portfolios in any particular year are uncorrelated with its own returns in other years. They re also uncorrelated with the returns of the other portfolio in other years. The hedge fund claims the correlation coefficient between the annua return on the 5&P500 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.)
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