Question

Greta, an elderly investor, has a degree of risk aversion of
*A* = 5 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 1-year strategies. (All rates
are annual and continuously compounded.) The S&P 500 risk
premium is estimated at 9% per year, with a SD of 17%. The hedge
fund risk premium is estimated at 9% with a SD of 34%. 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 returns
on the S&P 500 and the hedge fund in the same year is zero, but
Greta is not fully convinced by this claim.

**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. Enter your answers as decimals rounded to 4
places.)**

**S&P:**

**Hedge:**

**a-2.** What is the expected risk premium on the
portfolio? **(Do not round intermediate calculations. Enter
your answers as decimals rounded to 4 places.)**

Expected risk premium:

Answer #1

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**Answer:**

Greta, an elderly investor, has a degree of risk aversion of
A = 5 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 1-year strategies. (All rates
are annual and continuously compounded.) The S&P 500 risk
premium is estimated at 10% per year, with an SD of 16%. The hedge
fund risk premium is estimated at 8% with an SD of...

Greta, an elderly investor, has a degree of 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 6.6% per year, with a SD of 21.6%. The
hedge fund risk premium is estimated at 11.6% with a SD of...

Greta, an elderly investor, has a degree of 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 5.4% per year, with a SD of 20.4%. The
hedge fund risk premium is estimated at 10.4% with a SD of...

Greta, an elderly investor, has a degree of 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 6.6% per year, with a SD of 21.6%. The
hedge fund risk premium is estimated at 11.6% with a SD of...

Greta, an elderly investor, has a degree of 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 5.2% per year, with a SD of 20.2%. The
hedge fund risk premium is estimated at 10.2% with a SD of...

Greta, an elderly investor, ha a degree of risk aversion of A=4
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 1 year strategies (all rates are annual and
continuously compounded). The S&P 500 risk premium is estimated
at 5% per year with a SD of 17%. The hedge fund premium is
estimated at 9% with a SD of 34%....

Greta, an elderly investor, has a degree of 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 8.8% per year, with a SD of 23.8%. The
hedge fund risk premium is estimated at 13.8% with a SD of...

Greta, an elderly investor, has a degree of 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 7.2% per year, with a SD of 22.2%. The
hedge fund risk premium is estimated at 12.2% with a SD of...

Greta, an elderly investor, has a degree of 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 3-year strategies. (All rates are annual,
continuously compounded.) The S&P 500 risk premium is estimated
at 7% per year, with a SD of 20%. The hedge fund risk premium is
estimated at 5% with a SD of 26%....

Greta, an elderly investor, has a degree of risk aversion of
A = 4 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 4-year strategies. (All rates
are annual, continuously compounded.) The S&P 500 risk premium
is estimated at 5% per year, with a SD of 17%. The hedge fund risk
premium is estimated at 9% with a SD of 34%....

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