Problem $7-27$

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.

Calculate Greta's capital allocation using an annual correlation of $0\mathrm{.}3.($Do not round your

intermediate calculations. Round your answers to $2$ decimal places.$)$