Assuming the correlation between the annual returns

Assignment Help Financial Management
Reference no: EM131618737

Greta, an elderly investor, has a degree of risk aversion of A = 5 when applied to return on wealth over a 3-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of 3-year strategies. (All rates are annual, 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 return on each of these portfolios in any year is uncorrelated with its return or the return of any other portfolio in any other year. The hedge fund management 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 believes this is far from certain.

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. Round your answers to 2 decimal places. Omit the "%" sign in your response.)

S&P % Hedge %

2. What is the expected return on the portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) Expected return %

3. What should be Greta’s capital allocation? (Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the "%" sign in your response.) S&P % Hedge % Risk-free asset %

Reference no: EM131618737

Questions Cloud

The journal entry to replenish the fund would be : DogCo has a petty cash fund of? $275. The journal entry to replenish the fund would be? to:
The journal entry to record the first semiannual payment : The journal entry to record the first semiannual payment would be
What is price of call option with the same exercise price : A put option that expires in six months with an exercise price of $60 sells for $4.40. What is the price of a call option with the same exercise price?
Estimate the year one cash flow for proposed project : As a member of UA Corporation's financial staff, you must estimate the Year 1 cash flow for a proposed project with the following data. What is the Year 1 cash
Assuming the correlation between the annual returns : Assuming the correlation between the annual returns on the two portfolios is indeed zero, what would be the optimal asset allocation?
Jason repays his loan using the amortization method : Jason repays his loan using the amortization method, at an annual effective interest rate of i. he makes an annual payment of 500 at the end of each year.
Expected dividend payout ratio : Weaver Chocolate Co. expects to earn $3.50 per share during the current year, its expected dividend payout ratio is 65%,
Cash flows are highly correlated with cash flows : Taussig Technologies is considering two potential projects, X and Y. Cash flows are highly correlated with the cash flows from existing projects.
What is the year one cash flow : Revenues and other operating costs are expected to be constant over the project's 10-year expected life. What is the Year 1 cash flow?

Reviews

Write a Review

Financial Management Questions & Answers

  Considering adding one additional stock to 3-stock portfolio

A highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. However, Sto..

  Multinational operation for reason of regulatory advantage

A bank may establish a multinational operation for the reason of regulatory advantage. Banks follow their multinational customers abroad to prevent the erosion of their clientele to foreign banks seeking to service the multinational's foreign subsidi..

  Industrial firms paying dividends has increased

Which of the following are factors that help explain why the percentage of U.S. industrial firms paying dividends has increased since the early 2000s?

  What is the expected return on the portfolio

You own a portfolio that has $1,400 invested in Stock A and $1,000 invested in Stock B. If the expected returns on these stocks are 10% and 14%, respectively, what is the expected return on the portfolio?

  Value of the firm increases from the interest tax shield

As the level of debt increases, the value of the firm increases from the interest tax shield (TC xD) as well as improvements in managerial incentives.

  Three-month european call option on the market index

An investor purchases a three-month European call option on the market index with an exercise price of $1000 for a premium of $10. After three months, the market index spot price is $1011 and the investor’s position is closed. Find the rate of return..

  Compute and interpret precisely fixed asset turnover ratio

CC Corp. has a ratio of total debt to total assets of 0.45 and a current ratio of 1.25. CC (7%) Corp.’s current liabilities are $800, sales are $7,000, and total equity is $2,750. Compute and interpret precisely CC Corp.’s fixed asset turnover ratio.

  The central bank will typically withdraw liquidity

The central bank will typically withdraw liquidity when it desires a drop in interest rate. The central bank will typically add liquidity when it desires a rise in interest rate. The central banks purchases securities, mostly government bonds, to inj..

  Cash break-even-accounting break-even-financial break-evenn

Wettway Sailboat Corporation is considering whether to launch its new Margo-class sailboat. The selling price will be $28,000 per boat. The variable costs will be about half that, or $14,000 per boat, and fixed costs will be $600,000 per year. Cash b..

  What is an advantage that du-pont system of analysis

What is an advantage that the Du-Pont system of analysis offers over traditional ratio analysis?

  What is the after-tax selling price of the old machine

Bulldog Inc. purchased a leather machine seven years ago. The cost of the machine was $11,200. It was expected to be used for 10 years. The machine has been depreciated on a straight-line basis with an estimated salvage value of s1.200. What is the b..

  What is the cost of equity-market capitalization rate

Catalina Bank (CB) currently pays a dividend of $2.75 per share. T-bills are paying a 1.45% return and the market is anticipated to earn 9.65% per year. AAS has a beta of 1.32 and retains 60% of their earnings every year. What is the cost of equity (..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd