A portfolio manager summarizes the input from the macro and micro forecasters in the following table: a.
Question:
A portfolio manager summarizes the input from the macro and micro forecasters in the following table:
a. Calculate expected excess returns, alpha values, and residual variances for these stocks.
b. Construct the optimal risky portfolio.
c. What is Sharpe’s measure for the optimal portfolio and how much of it is contributed by the active portfolio?
d. What should be the exact makeup of the complete portfolio for an investor with a coefficient of risk aversion of2.8?
Micro Forecasts Asset Stock A tock B Stock C tock D Expected Return (%) 20 18 17 12 Beta 1.3 1.8 0.7 Residual Standard Deviation (%) 58 71 60 Macro Forecasts Asset -bills Passive equity portfolio Expected Return (%) Standard Deviation (%) 16 23
Step by Step Answer:
a Alpha Expected excess return i r i r f i r M r f Er i r f A 20 8 13 16 8 16 20 8 12 B 18 8 18 16 8 44 18 8 10 C 17 8 07 16 8 34 17 8 9 D 12 8 10 16 ...View the full answer
Related Video
Stocks (also known as equities) are securities that represent ownership in a company. They are issued by companies to raise capital, and when an individual buys stocks, they become a shareholder in that company. Investing in stocks can be a way for individuals to potentially earn a return on their investment through dividends and capital appreciation. However, investing in stocks also carries a level of risk, as the value of the stock can fluctuate based on various factors such as the financial performance of the company and general market conditions. For companies, issuing stocks can be a way to raise funds for growth and expansion. When a company goes public by issuing an initial public offering (IPO), it can raise significant capital by selling ownership stakes to the public. Companies can also issue additional stock offerings to raise additional capital as needed.
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