EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 7, Problem 22PS
Summary Introduction
To compute: The values for annual premium, standard deviation and Sharpe ratio for both portfolios.
Introduction: The Sharpe ratio is the ratio which is calculated by dividing the risk premium by the standard deviation.
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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% per year, with a SD of 20%. The hedge fund risk premium is estimated at 10% with a SD 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.Assuming the correlation between the annual returns on the two portfolios is indeed zero, what would be the optimal asset allocation?
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% per year, with a SD of 20%. The hedge fund risk premium is estimated at 10% with a SD 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.If the correlation coefficient between annual portfolio returns is actually .3, what is the covariance between the returns?
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% per year, with a SD of 20%. The hedge fund risk premium is estimated at 10% with a SD 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 returns on the S&P 500 and the hedge fund in the same year is zero, but Greta is not fully convinced by this claim.
Calculate Greta’s capital allocation using an annual correlation of 0.3?
S&P
Hedge fund
Risk -free asset
Chapter 7 Solutions
EBK INVESTMENTS
Ch. 7 - Prob. 1PSCh. 7 - Prob. 2PSCh. 7 - Prob. 3PSCh. 7 - Prob. 4PSCh. 7 - Prob. 5PSCh. 7 - Prob. 6PSCh. 7 - Prob. 7PSCh. 7 - Prob. 8PSCh. 7 - Prob. 9PSCh. 7 - Prob. 10PS
Ch. 7 - Prob. 11PSCh. 7 - Prob. 12PSCh. 7 - Prob. 13PSCh. 7 - Prob. 14PSCh. 7 - Prob. 15PSCh. 7 - Prob. 16PSCh. 7 - Prob. 17PSCh. 7 - Prob. 18PSCh. 7 - Prob. 19PSCh. 7 - Prob. 20PSCh. 7 - Prob. 21PSCh. 7 - Prob. 22PSCh. 7 - Prob. 23PSCh. 7 - Prob. 1CPCh. 7 - Prob. 2CPCh. 7 - Prob. 3CPCh. 7 - Prob. 4CPCh. 7 - Prob. 5CPCh. 7 - Prob. 6CPCh. 7 - Prob. 7CPCh. 7 - Prob. 8CPCh. 7 - Prob. 9CPCh. 7 - Prob. 10CPCh. 7 - Prob. 11CPCh. 7 - Prob. 12CPCh. 7 - Prob. 13CP
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