Question

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 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 return on the
S&P 500 and the hedge fund return 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 0.3, 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 return on the portfolio?
**(Do not round intermediate calculations. Enter your answers
as a decimal rounded to 4 places.)**

expected return: _____________

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 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 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 = 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 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 = 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...

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...

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