Question

If: risk aversion A = 3 risk premium S = 0.08 , std deviation of S...

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?

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Answer #1

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

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