Question

If:

risk aversion A = 3

risk premium S = 0.08 , std deviation of S = 0.22

risk premium H = 0.10, std deviation of H = .37

Assume: p (correlation coeff) = 0 ; disregard the risk free rate; horizon is 1 year.

**What is the optimal asset allocation of S and H? What is
the risk premium on this portfolio?**

Answer #1

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

Cell reference -

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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on wealth over a 1-year horizon. She is pondering two
portfolios, the S&P 500 and a Hedge Fund. (All rates are
annual, and continuously compounded). The S&P 500 risk
premium is 8% per year, with a standard deviation of 22%.
The Hedge Fund risk premium is 10%, with a standard
deviation of 37%. The returns on both of these in any
particular year are uncorrelated with its own...

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
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standard deviation of 20%. The hedge fund risk premium is estimated
at 10% with a standard deviation of 35%. The returns on...

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 8% per year, with a
standard deviation of 22%. The hedge fund risk premium is estimated
at 10% with a standard deviation of 37%. The returns on...

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 6% per year, with a
standard deviation of 18%. The hedge fund risk premium is estimated
at 8% with a standard deviation of 33%. The returns on...

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...

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 8% per year, with a
standard deviation of 23%. The hedge fund risk premium is estimated
at 10% with a standard deviation of 38%. The returns on...

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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 a
standard deviation of 16%. The hedge fund risk premium is estimated
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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 8% per year, with a
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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
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