Question

Consider the following two-portfolio scenario: risk aversion A = A risk premium S = 0.09 ,...

Consider the following two-portfolio scenario:

risk aversion A = A

risk premium S = 0.09 , std deviation of S = 0.18

risk premium H = 0.12, std deviation of H = .33

Assume: p (correlation coeff) = 0.30 ; horizon is 1 year; disregard risk-free rate.

What is the optimal asset allocation (of S and H)?

What is the risk premium on this portfolio?

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Answer #1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

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