Question: A portfolio manager summarizes the input from the macro and micro forecasters in the following table: Macro Forecasts Asset Expected Return (%) Beta Residual Standard

A portfolio manager summarizes the input from the macro and micro forecasters in the following table:

Macro Forecasts
AssetExpected Return (%)BetaResidual Standard Deviation (%)
Stock A
21
1.1
60
Stock B
14
1.5
72
Stock C
12
0.6
63
Stock D
10
0.9
53

Macro Forecasts
AssetExpected Return (%)Standard Deviation (%)
T-bills
6

0
Passive equity portfolio
12

18

Calculate the following for a portfolio manager who is not allowed to short sell securities.

a.

What is the cost of the restriction in terms of Sharpe’s measure? 

Cost of restriction _______??



b.

What is the utility loss to the investor (A = 2.6) given his new complete portfolio? 

CasesUtility levels
Unconstrained________%??
Constrained________%??
Passive________%??

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