Question

The S&P 500 index of U.S. stocks has an expected return of 0.10 and a variance of 0.04, and the index of Emerging Market stocks has an expected return of 0.08 and a variance of 0.03. Their correlation is 0.25 and the risk-free rate is 0.03. What is your optimal allocation to the S&P 500 index if you maximize your tradeoff between portfolio expected return and variance, your risk aversion is 3, and you do not face any financial constraints? Answer in decimal form with two decimals (i.e. 20.33% is 0.20).

Answer 1

Explanation:

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