Calculate the standard deviation of the rate of return

Reference no: EM131978837

Question: 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 7% per year, with a SD of 19%. The hedge fund risk premium is estimated at 11% with a SD of 38%. 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.

Using an annual correlation of 0.3, calculated the standard deviation of the rate of return on this investment if you have a project that has a 0.7 chance of doubling your investment in a year and a 0.3 chance of halving your investment in a year. (Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.)

Reference no: EM131978837

Questions Cloud

Assume the firm pays no dividends : What is the total external financing needed if sales increase 25%? Assume the firm pays no dividends.

Describe the typical behaviors : Describe the typical behaviors that such a client might emit during periods of emotional stress or when encountering stressful or anxiety producing events

Conduct adequate sensitivity analyses : Conduct adequate sensitivity analyses of how factors that were problematic in estimation of WACC will affect your computations.

What is value of your retirement plan : What is the value of your retirement plan after the 50 years?

Calculate the standard deviation of the rate of return : Using an annual correlation of 0.3, calculated the standard deviation of the rate of return on this investment if you have a project that has a 0.7 chance.

Describe the rationale behind the selection of each article : 92440 - EVIDENCE FOR NURSING - Briefly describe how you approached answering the question. i.e. which databases and which search terms you used in the search.

What is an estimate of growth company cost of equity : Growth Company's current share price is $19.90 and it is expected to pay a $1.25 dividend per share next year. After that, the firm's dividends are expected.

Stocks with respect to both mean return and volatility : In light of the apparent inferiority of gold to stocks with respect to both mean return and volatility, would anyone hold gold?

What was your annual salary be five years : Today, you earn a salary of $75,000. What was your annual salary be five years ago if you receive annual raises of 3.2%?

User Account

All Pages