Question

PLEASE PROVIDE THE STEPS TO SOLVE THE PROBLEM. THANK YOU SO MUCH!

Check my work Greta, an elderly investor, has a degree of 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 6% per year, with a SD of 20%. The hedge fund risk premium is estimated at 4% with a SD of 23%. 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 Skipped eBook a-1. Assuming the correlation between the annual returns on the two portfolios is indeed zero, what would be the optimal asset allocation? (Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.) Print References S&P Hedge

Answer 1

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ANSWERS ARE SHOWN IN % AND DECIMALS

a-1 : 0.6649 AND 0.3351

a-2 : 5.3297%

OPTIMAL RISKY PORTFOLIO VC AMORT SINKING JORDAN - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins File Home Insert Page Layout Formulas - 2x % Cut 1 1. P A pt Wrap Text Merge & Center - Percentage $ - % , . Conditional Format Formatting as Table Styles Cell Styles Insert Delete Format AutoSum- A Fill Sort & Find & 2 Clear Filter Select Editing Alignment Number Cells F G H I J K L M M Calibri 11 AA = = = E Copy Paste Format Painter BI U D A E Clipboard Font L45 - fi =(E38*D42+E39*D43)/100 A B C D E 28 SD (D) 20.0000 31 0 (E) 23.0000 32 N G 29 30 VARIANCE (O (D))^2 (0 (E))^2 400.00 529.00 0.0000 E(RD) = R(RE) = 33 3174 34 35 WD = 36 37 38 a-1 I=(J30)*G31) - (131)*(G32)*(D30)*(D31) [=(130)*(G31)+(131)*(G30)-(130+)31)*((G32)*(D30)*(D31))] [=(6) *(529) - (4)*((0.0000) * (20)*(23))] (6)*(529)+(4)*(400)-(6+4)*((0)*(20)*(23)) 4774 WEIGHTS WD)= W(E) = 0.6649 0.3351 66.49% 33.51% s&p hedge 39 40 41 E(RD) = R(RE) = 42 43 44 45 a-2 46 HEM Red EXPECTED RISK PREMIUM = E(Rp) = W(D)*R(D) + W(E)*R(E ) = (66.49%)*(6%) + (33.51%)*(4%) = BEST CAL BINOMIAL 2 TIME SINKING AMORTIZA Sheet2 VC JORDAN INSURANCE Sheet1 Sheet3 Sheet4 Sheets Sheeto greta M IN VAR PORT ferences 5.3297% 0.0533 [IN DECIMALS] Sheets 0 | 0 BO. 130% 40-_+ O 02:37 * ENG 31-10-2019 SPOR 9