Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. greta, an elderly investor, has a degree of risk a

Greta, an elderly investor, has a degree of risk aversion of A = 4 when applied...

90.2K

Verified Solution

Question

Finance

Greta, an elderly investor, has a degree of risk aversion ofA = 4 when applied to return on wealth over a one-yearhorizon. She is pondering two portfolios, the S&P 500 and ahedge fund, as well as a number of 1-year strategies. (All ratesare annual and continuously compounded.) The S&P 500 riskpremium is estimated at 9% per year, with a SD of 18%. The hedgefund risk premium is estimated at 5% with a SD of 25%. The returnson both of these portfolios in any particular year are uncorrelatedwith its own returns in other years. They are also uncorrelatedwith the returns of the other portfolio in other years. The hedgefund claims the correlation coefficient between the annual returnson the S&P 500 and the hedge fund in the same year is zero, butGreta is not fully convinced by this claim.

a-1. Assuming the correlation between theannual returns on the two portfolios is indeed zero, what would bethe optimal asset allocation? (Do not round intermediatecalculations. Enter your answers as decimals rounded to 4places.)

s&p =

Hedge =

a-2. What is the expected risk premium on theportfolio? (Do not round intermediate calculations. Enteryour answers as decimals rounded to 4 places.)


Answer & Explanation Solved by verified expert
4.1 Ratings (757 Votes)
Risk premiumStandard DeviationSP 500 x918Hedge Fund y525Correlation is 0a1We can use the general formula to for    See Answer
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students

Basic Math
1.2K views

Find the area of the triangle specified below a 14 meters b 14 meters c...

Finance
1.2K views

Suppose your company needs to raise $55 million and you want to issue 25-year bonds for...

Statistics
1.2K views

According to AARP, in 2008, 49% of all annual expenditure on restaurant food was by Americans...

Chemistry
1.2K views

A mixture of 6.92e-02 mol of Cl2, 2.15e-02 mol of H2O, 6.78e-02 mol of HCl, and...

Biology
1.2K views

top predator carnivores herbivores producers Energy Top Predator In the energy pyramid below which organism...

Biology
1.2K views

Substances move through the rough E R then enter the smooth E R To continue...

Calculus
1.2K views

11 Use the slicing method to find the volume of a pyramid with a square...

Accounting
1.2K views

3. The following data are for Honey Dee Store. The account balances (in thousands) are...

Accounting
1.2K views

Blue Star Airline provides passenger airline service, using small jets. The airline connects four major...

Accounting
1.2K views

Check my work 1 Exercise 8.8 (Static) Posting to the general ledger and the accounts...

Accounting
1.2K views

Given the following cost and activity observations for Bounty Company's utilities, use the high-low method...

Accounting
1.2K views

Consider how cherry valley a popular ski resort could use capital budgeting to decide whether...