Given the variance-covariance matrix, for the market S&P 500 and stocks X and Y, which is based
Question:
Given the variance-covariance matrix, for the market S&P 500 and stocks X and Y, which is based on monthly data from July 2000 to June 2005 (given the assumption that it is July 2005). Suppose both X and Y are listed S&P 500 index. The beta of X is 0.727 and the beta of Y is 0.75. The average monthly risk premiums from 2000 to 2005 were: For S&P500 is 1.0%; For X is 0.6% and for Y is 1.1%. Assume the CAPM holds and the expected future market risk premium is 0.6% monthly. The risk-free interest rate is 0.3% monthly.
S&P500 | X | Y | |
S&P500 | 0.0256 | 0.0186 | 0.0192 |
X | 0.0186 | 0.1225 | 0.0262 |
Y | 0.0192 | 0.0262 | 0.0900 |
a. What were the alpha’s for stocks X and Y over the last 60 months?
b. What are the expected future rates of return for X and Y?
c. What are the optimal portfolio weights for the S&P 500, X and Y? Please explain the answer qualitatively.
Applied Regression Analysis and Other Multivariable Methods
ISBN: 978-1285051086
5th edition
Authors: David G. Kleinbaum, Lawrence L. Kupper, Azhar Nizam, Eli S. Rosenberg