A portfolio manage summarizes the input from the macro and micro forecasts in the following table: Micro
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Question:
A portfolio manage summarizes the input from the macro and micro forecasts in the following table:
Micro Forecasts
Asset | Expected Return (%) | Beta | Residual Standard Deviation (%) |
---|---|---|---|
Stock A | 18 | 2.00 | 50 |
Stock B | 16 | 3.00 | 50 |
Macro Forecasts
Asset | Expected Return (%) | Residual Standard Deviation (%) |
---|---|---|
T-bills | 4 | 0 |
Passive Equity Portfolio (m) | 14 | 20 |
a). Calculate expected excess returns, alpha values, and residual variances for these stocks.
b). Suppose that the portfolio manager follows the Treynor-Black model and constructs an active portfolio (p) that consists of the above expected return -18%, and its residual standard deviation is 150%.
c). What is the Sharpe ratio for the optimal portfolio (consisting of the passive equity portfolio and the active portfolio(p))?
d). How much of the Sharpe ratio is contributed by the active portfolio?
e). What’s the M2 of the optimal portfolio?
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