Hedge fund claims correlation coefficient

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Greta has a risk aversion of A=3 when applied to return on wealth over a one year horizon. The S&P risk premium is estimated at 8.4% per year with a SD of 23.4%. The hedge fund risk premium is estimated at 13.4% with a SD of 38,4%. The returns on these portfolios in any particular year are uncorrerelated wth it’s own returns in any other years. They are also uncorrelated with the returns of the other portfolio in other years. The hedge fund claims correlation coefficient between the annual returns on the S&P and the hedge fund in the same year is zero. Assuming the correlation between the annual returns on the two portfolios is .3 what would be the optimal asset allocation? Round to 4 places. What is the expected return on the portfolio? Round to 4 places and please show your work.

Reference no: EM131863073

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