Greta has risk aversion of A = 4 when applied to return on wealth over...
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Greta has risk aversion of A = 4 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the TSX/S&P Composite Index and a hedge fund, as well as a number of one-year strategies. (All rates are annual and continuously compounded.) The TSX/S&P Composite Index risk premium is estimated at 10% per year, with a standard deviation of 22%. The hedge fund risk premium is estimated at 14% with a standard deviation of 44%. 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 return on the TSX/S&P Composite Index and the hedge fund return in the same year is zero, but Greta is not fully convinced by this claim.
What should be Gretas capital allocation? Assume that the correlation between the annual returns on the two portfolios is indeed zero. (Do not round intermediate calculations. Enter your answers rounded to 2 decimal places.)
S&P
%
Hedge
%
Risk-free asset
%
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