5. As a portfolio manager, you're benchmarked against the S&P500, which is a passive portfolio. Of...
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5. As a portfolio manager, you're benchmarked against the S&P500, which is a passive portfolio. Of the 500 stocks in this passive portfolio, you believe only 2 are mispriced. You've forecast NVDA to have an alpha of +5% (its beta is 1.5 and its residual standard deviation is 20%) and NFLX to have an alpha of +3% (its beta is 1.2 and its residual standard deviation is 25%). The forecast for SP500's expected return is 17% and standard deviation of returns is 22%. Treasuries earn 2%. You have $1 to invest. What should be the fraction of each dollar invested in the 3 assets: SP500, FB, and IBM? Make sure the sum adds up to 1. Please show your workings for: a. b. C. d. e. f. Initial Fraction of NVDA and NFLX in the active portfolio (given only two securities, you could get whacky numbers here). Alpha of the active portfolio. Beta of the active portfolio. Unsystematic variance of the active portfolio. Fraction of the optimal risky portfolio that will be invested in the active portfolio. Final weights of the 3 components of the risky portfolio. 5. As a portfolio manager, you're benchmarked against the S&P500, which is a passive portfolio. Of the 500 stocks in this passive portfolio, you believe only 2 are mispriced. You've forecast NVDA to have an alpha of +5% (its beta is 1.5 and its residual standard deviation is 20%) and NFLX to have an alpha of +3% (its beta is 1.2 and its residual standard deviation is 25%). The forecast for SP500's expected return is 17% and standard deviation of returns is 22%. Treasuries earn 2%. You have $1 to invest. What should be the fraction of each dollar invested in the 3 assets: SP500, FB, and IBM? Make sure the sum adds up to 1. Please show your workings for: a. b. C. d. e. f. Initial Fraction of NVDA and NFLX in the active portfolio (given only two securities, you could get whacky numbers here). Alpha of the active portfolio. Beta of the active portfolio. Unsystematic variance of the active portfolio. Fraction of the optimal risky portfolio that will be invested in the active portfolio. Final weights of the 3 components of the risky portfolio.
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