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

Micro ForecastsAssetExpected Return (%)BetaResidual Standard Deviation (%)Stock A231.550Stock B201.967Stock C190.856Stock D141.051Macro ForecastsAssetExpected Return (%)Standard Deviation (%)T-bills100Passive equity portfolio1824

Required:

a)Calculate expected excess returns, alpha values, and residual variances for these stocks.

b)Compute the proportion in the active portfolio and the passive index.

c)What is the Sharpe ratio for the optimal portfolio?

d)By how much did the position in the active portfolio improve the Sharpe ratio compared to a purely passive index strategy?

e)What should be the exact makeup of the complete portfolio (including the risk-free asset) for an investor with a coefficient of risk aversion of 3.0?

a)Calculate expected excess returns, alpha values, and residual variances for these stocks. Note: Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round "Alpha values" to 1 decimal place. Calculate using numbers in decimal form, not percentages. For example use "20" for calculation if standard deviation is provided as 20%.

Stock AStock BStock CStock DExcess returns%%%%Alpha values%%%%Residual variances

b) Compute the proportion in the active portfolio and the passive index. Note: Negative values should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as decimals rounded to 4 places. Calculate using numbers in decimal form, not percentages. For example use "20" for calculation if standard deviation is provided as 20%.

Proportion in Active PortolioProportion in Passive Index

c) What is the Sharpe ratio for the optimal portfolio? Note: Do not round intermediate calculations. Enter your answer as decimals rounded to 4 places. Calculate using numbers in decimal form, not percentages. For example use "20" for calculation if standard deviation is provided as 20%.

d) By how much did the position in the active portfolio improve the Sharpe ratio compared to a purely passive index strategy? Note: Do not round intermediate calculations. Enter your answer as decimals rounded to 4 places. Calculate using numbers in decimal form, not percentages. For example use "20" for calculation if standard deviation is provided as 20%.

e)

What should be the exact makeup of the complete portfolio (including the risk-free asset) for an investor with a coefficient of risk aversion of 3? Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Calculate using numbers in decimal form, not percentages. For example use "20" for calculation if standard deviation is provided as 20%.

Final PositionsBills%M%A%B%C%D%Total%