Question

In: Finance

what would be the optimal asset allocation? What is the expected return on the portfolio? Greta,...

what would be the optimal asset allocation? What is the expected return on the portfolio?

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 5.2% per year, with a SD of 20.2%. The hedge fund risk premium is estimated at 10.2% with a SD of 35.2%. 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.

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.)

S&P ?
Hedge ?

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

Expected return ?

Solutions

Expert Solution

jeff jeffy answered 5 months ago
Next > < Previous

Related Solutions

Investing includes risk, return, portfolio construction, asset allocation, and the evaluation of the portfolio. Discuss return...
Investing includes risk, return, portfolio construction, asset allocation, and the evaluation of the portfolio. Discuss return as it is related to risk. What is return, component parts of return, historical returns, and the relationship of returns, and considerations in evaluating return?
4. Assume that the portfolio expected return for asset one is 0.15 and the expected return...
4. Assume that the portfolio expected return for asset one is 0.15 and the expected return for asset two is 0.10. The variance of both returns is one and the correlation between the returns is 0.75. Assume equal weighting for each asset. Compute the expected return and variance of the portfolio. Assume that the risk free rate is 0.05. Compute the Sharpe ratio of the portfolio. Now allocate 0.60 to asset one and 0.40 to asset two. Recompute all the...
What is the expected return on a portfolio? How can the expected return on a portfolio...
What is the expected return on a portfolio? How can the expected return on a portfolio be manipulated to minimize the risk on that portfolio? Justify your answer
A portfolio that combines the risk-free asset and the market portfolio has an expected return of...
A portfolio that combines the risk-free asset and the market portfolio has an expected return of 6 percent and a standard deviation of 9 percent. The risk-free rate is 3 percent, and the expected return on the market portfolio is 11 percent. Assume the capital asset pricing model holds.    What expected rate of return would a security earn if it had a .35 correlation with the market portfolio and a standard deviation of 54 percent?
A portfolio that combines the risk-free asset and the market portfolio has an expected return of...
A portfolio that combines the risk-free asset and the market portfolio has an expected return of 6.7 percent and a standard deviation of 9.7 percent. The risk-free rate is 3.7 percent, and the expected return on the market portfolio is 11.7 percent. Assume the capital asset pricing model holds. What expected rate of return would a security earn if it had a .42 correlation with the market portfolio and a standard deviation of 54.7 percent? (Do not round intermediate calculations....
If a portfolio has a positive weight for each asset, can the expected return on the...
If a portfolio has a positive weight for each asset, can the expected return on the portfolio be greater than the return on the asset in the portfolio that has the highest return? Can theexpected return on the portfolio be less that the return on the asset in the portfolio with the lowest return? Explain.
If a portfolio has a positive weight for each asset, can the expected return on the...
If a portfolio has a positive weight for each asset, can the expected return on the portfolio be greater than the return on the asset in the portfolio that has the highest return? Can theexpected return on the portfolio be less that the return on the asset in the portfolio with the lowest return? Explain
If you wished to construct an optimal risky portfolio with these two assets, what is the percentage this portfolio would consist of for risk asset 1?
Risk asset 1 Risk asset 2 Expected return .12 .16 Standard deviation .27 .89 If you wished to construct an optimal risky portfolio with these two assets, what is the percentage this portfolio would consist of for risk asset 1? And risk asset 2? 3.8% risk free rate and .009 coeficent correlation
The following are the expected returns on a portfolio of investments. What is the expected rate of return on the portfolio?
The following are the expected returns on a portfolio of investments. What is the expected rate of return on the portfolio? Investment # of shares Price per share Expected returnA. 2000 $20 10%B. 3000 $10 15%C. 1000 $15 8%
what is an appropriate asset allocation for the investment portfolio of a 30 year old? what...
what is an appropriate asset allocation for the investment portfolio of a 30 year old? what is dollar cost averaging and what should the investor do to take advantage of it? As the investor gets old, should he/she make adjustments to the allocation? If so, please discuss how the allocation in each asset class should change and why.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT