Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. greta has risk aversion of a = 3 when applied to r

Greta has risk aversion of A = 3 when applied to return on wealth over...

50.1K

Verified Solution

Question

Finance

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 5% per year, with a standard deviation of 20%. The hedge fund risk premium is estimated at 12% with a standard deviation of 35%. 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.)

a-2. What is the expected risk premium on the portfolio? (Do not round intermediate calculations. Enter your answers as a decimal rounded to 4 places.)

Answer & Explanation Solved by verified expert
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

Advance Math
1.2K views

Group of Symmetries of a Cube a. Carefully describe the group of symmetries of a cube. Describe...

Psychology
1.2K views

What do we mean by depth of processing? How does it relate to the Encoding Specificity...

Basic Math
1.2K views

3 Consider the function f x e 1 2 2 2 Show that x 0...

Basic Math
1.2K views

A single fair die is tossed. Find the odds in favor of rolling a number...

Basic Math
1.2K views

Explain the difference between finding P(A or B) and P(A and B). Suppose A and...

Algebra
1.2K views

Find the number of different arrangements of the 8 letters of the word EDUCATOR in...

Algebra
1.2K views

5 Solve each question Round your answer to the nearest hundredth 6 Asanji can wax...

Accounting
1.2K views

financial statements they need to give to the bank and prepare taxes...

Accounting
1.2K views

kendrick company has total assets of $75,000 and total liabilities of $45,000. how much is...

Accounting
1.2K views

Saved Help Chapters e Save & Berg Tooling reports net sales of $415,000, gross profit...

Accounting
1.2K views

please answer #2 The Stratton Township Park The Stratton Township Park is located on a...

Accounting
1.2K views

Explain and discuss three pros and three cons to government regulation of the insurance industry.