Question: A portfolio manager summari s es the input from forecasts in the following table: Financial Asset Average return Beta ( ) Residual standard deviation (

A portfolio manager summarises the input from forecasts in the following table:

Financial Asset	Average return	Beta ()	Residual standard deviation ()
Stock A	7.7%	0.8	12%
Stock B	2.4%	0.4	7%
Stock C	10.8%	1.2	15%

The average market return is 5%, and the risk-free rate is 1%. The standard deviation of market return is 12%. All variables are provided on an annualised basis. You are asked to perform the following tasks:

(i) Use the Capital Asset Pricing Model to calculate the expected excess returns, and the alpha values for each of these stocks.

(ii) Calculate the weights on each of these stocks in the optimal portfolio.

(iii) Calculate the values of alpha and beta and that of the residual variance for the active portfolio. Calculate the weight of the passive portfolio

(iv) What is the Sharpes ratio for the optimal portfolio and how much of it is contributed to the active portfolio?

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

A portfolio manager summarises the input from forecasts in the following table: Financial Asset Average return Beta () Residual standard deviation () Stock A 7.7% 0.8 12% Stock B 2.4% 0.4 7% Stock C...

i) A portfolio manager summarises the input from forecasts in the following table: Financial Asset Average return Beta (B2 Residual standard deviation (8) Stock A 7.7% 0.82 12% Stock Be 2.4% 0.42 7%...

a) A portfolio manager summarises the input from forecasts in the following table: Financial Asset- Average returne Beta (Be Residual standard deviation o(8) Stock Ae 7.7% 0.8e 12% Stock Be 2.4% 0.40...

What is passive bond portfolio management? Briefly explain two different passive bond portfolio management strategies (25% weighting) b) A portfolio manager summarises the input from forecasts in the...

a) What is passive bond portfolio management? Briefly explain two different passive bond portfolio management strategies. (25% weighting) b) A portfolio manager summarises the input from forecasts in...

A portfolio manager summarizes the input from the macro and micro forecasters in the following table: Micro Forecasts Asset Expected Return (%) Beta Residual Standard Deviation (%) Stock A 24 1.2 64...

Elaborate the answers in excel if possible A portfolio manager summarizes the input from the macro and micro forecasters in the following table: Micro Forecasts Asset Expected Return (%) Beta...

A portfolio manager summarizes the input from the macro and micro forecasts in the following table: Micro Forecasts Asset Expected Return (%) Beta Residual Standard Deviation (%) Stock A 22 1.50 40...

Please help with Part B A portfolio manager summarizes the input from the macro and micro forecasts in the following table: Micro Forecasts Asset Expected Return (%) Beta Residual Standard Deviation...

Q8. For the given binary compounds, CoCl3, FeCl3 and PtCl2, the primary valences are: (a) 3, 2, 2 respectively (b) 2, 2, 2 respectively (c) 3, 3, 2 respectively (d) 0, 0, 0 respectively

create my data flow diagram and pseudocode, the flowchart and entity relationship diagram is in the image below, you can base on it while creating the data flow diagram and pseudocode. The data flow...

Lease versus Borrow (LO4) Return to the case of the diagnostic scanner used in Problems 2 through 7. Suppose the entire $6.3 million purchase price of the scanner is borrowed. The rate on the loan is...

A company is preparing completing their Cash Budget. The following data has been prepared for cash receipts and payments. January February March Cash receipts $1,061,200 $1,182,400 $1,091,700 Cash...