Jesse has a utility function  = ()  1/22, with risk aversion of A=3, 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. The TSX/S&P Composite Index risk premium is estimated at 5% per year, with a standard deviation of 20%. The hedge fund risk premium is estimated at 10% with a standard deviation of 35%. a. Assume the correlation between annual returns on the two portfolios is zero, what would be the optimal asset allocation? b. What should be Jesse's capital allocation? c. If the correlation coefficient between annual portfolio return s is actually 0.3, what is the covariance between the returns?

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a To find the optimal asset allocation Let x proportion allocated to ... View the full answer