Question

PLEASE SHOW HOW YOU SOLVE THE EQUATION--I WOULD LIKE TO SEE THE STEPS TAKEN TO ARRIVE AT THE ANSWER. THANK YOU!

Check my work 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 8.8% per year, with a SD of 23.8%. The hedge fund risk premium is estimated at 13.8% with a SD of 38.8%. 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. points eBook Print Calculate Greta's capital allocation using an annual correlation of 0.3. (Do not round your intermediate calculations. Round your answers to 2 decimal places.) References S&P Hedge Risk-free asset

Answer 1

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& Autosum - X - Mg = OPTIMAL RISKY PORTFOLIO VC AMORT SINKING JORDAN - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins Cut Calibri -11AA Der Wrap Text General E Copy Paste BI U B A E Merge & Center $ % , Format Painter Conditional Format Cell Insert Delete Format Formatting as Table Styles Clipboard Font Alignment Number Styles Cells G6 - fix Α Fill 2 Clear Sort & Find & Filter - Select Editing D E F G H I J K M N 6 7 8 9 TC Won EtRD).5€ - Etre) . . 57.60 ELRD).6 3 + E(Re). O _ -LEAO+E(R). .56.0D 10 11 WD = weight of s&P WE= weight of Hedge E(RD) = Risk premium sto E(RE) = Risk premium Hedge = standard deviation S4P GE= Standard deviation Hedge 23 24 K M MIN VAR PORT BEST CAL BINOMIAL 2 TIME SINKING AMORTIZA Sheet2 VC JORDAN INSURANCE Sheet1 Sheet3 Sheet4 Sheets Sheet6 greta Sheets BO Red 130% - ODEB9lla * H ENG ENO 30-10-2019

OPTIMAL RISKY PORTFOLIO VC AMORT SINKING JORDAN - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins Formulas - 2x 11 A = = = V General A A Wrap Text Merge Merge & Center Center AutoSum - A Fill 2 Sort & m Find & SF $ - % % 4:0 .00 8.9 Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles 2 Clear Filter Editing Select Alignment Number Cells File Home Insert Page Layout % Cut Calibri Ea Copy Paste Format Painter B I U - D Clipboard Font K28 A B C 28 29 SD (D) 31 O(E) 32 D E J K L M 30 23.8000 38.8000 VARIANCE (O (D))^2 (0 (E))^2 566.44 1505.44 0.3000 E(RD) = R(RE) = 8.8 13.8 33 [=(J30)*(G31) - (131)*((G32)*(D30)*(D31)) [=(130)*(G31)+(131)*(G30)-(130+)31)*((G32)*(D30) *(D31))) [=(8.8)*(1505.44) - (13.8)*(0.0000)*(23.8)*(38.8) (8.8)*(1505.44)+(13.8) *(566.44)-(8.8+13.8)*((0) *(23.8)*(38.8) 9424.83 14803.82 34 35 W(D) = 36 37 38 a-1 39 40 41 42 43 44 WEIGHTS WID)= W(E) = 0.6366 0.3634 63.66% 36.34% s&p hedge 8.8 E(RD) = R(RE) = 13.8 45 a-2 EXPECTED RISK PREMIUM = E(Rp) = W(D)*R(D) + W(E)*R(E ) = (63.66%)*(8.8%) + (36.34%)*(13.8%) = 46 HEM Red 10.62% 0.1062 [IN DECIMALS] Sheets 0 | BOU 130% 0 M IN VAR PORT BEST CAL BINOMIAL 2 TIME SINKING AMORTIZA Sheet2 VC JORDAN INSURANCE Sheet1 Sheet3 Sheet4 Sheets Sheeto greta 0 EJER * QENG 30-10-2019

OPTIMAL RISKY PORTFOLIO VC AMORT SINKING JORDAN - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins Formulas - 2x 11 A = = = V General A A Wrap Text Merge & Center AutoSum - A Fill 2 Sort & m Find & $ - % 8.9 Formatting as Table Styles Styles 2 Clear Filter Editing Select Alignment Number Cells File Home Insert Page Layout * Cut Calibri E Copy Paste Format Painter B I U - D Clipboard Font K47 - fix A B C 47 0(D) 48 O(E) 49 r= E J K L M D 23.8 38.8 0.3000 50 51 52 53 54 PORTFOLIO VARIANCE = (W(D))^2*(SD(D))^2 + (W(E))^2*(SD(E)^2 + 2 W(D)*W(E)* SD(D)*SD(E)*r PORTFOLIO VARIANCE = [(0.6366)^2*(23.8)^2 + (0.3634)^2*(38.8)^2 +2*(0.6366)*(0.3634)*(23.8)*(38.8)*(0.3)] PORTFOLIO VARIANCE = 556.54038 STANDARD DEVIATION = 23.5911 % [SQRT(variance)] 0.235911 [IN DECIMALS] 55 56 57 58 (E(rp))/(A*(62)) (0.1066)/3(0.2076922) = 0.6358782 59 60 INVESTMENT PROPORTION y = 63.59% 61 0.6366 x 63.59% 0.3634 x 63.59% 100% - 63.59% IN % 40.49% 23.10% 36.41% 62 ANSWER INVESTMENT IN S&P = 63 INVESTMENT IN HEDGE= 64 INVESTMENT IN T BILL = 65 HEM M IN VAR PORT BEST CALBINOMIAL 2 TIME Red SINKING AMORTIZA Sheet2 VC JORDAN INSURANCE Sheet1 Sheet3 Sheet4 Sheets Sheeto greta Sheets 0 | BOI 130% 0 0 + DOR . * ENG 30-10-2019