Question

Greta has **risk aversion of A = 3 when applied to return
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 returns in other
years; they are also uncorrelated with the return 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 in the same year is zero, but Greta isn't fully
convinced by this claim.

a) Assuming the correlation between the annual returns on the
two portfolios is indeed *zero*, **what would be the
Optimal Asset Allocation?**

b) What is **the Expected Risk Premium on the
portfolio?**

Answer #1

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 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 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 = 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 a
standard deviation of 16%. The hedge fund risk premium is estimated
at 12% with a standard deviation of 31%. The returns on...

Greta has 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 8% per year, with a
standard deviation of 18%. The hedge fund risk premium is estimated
at 10% 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...

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, 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...

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 = 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...

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