Question: Question 4 (40 points) Q4 (40 points): In a single-factor world, manager X is a Henrikkson-Merton market timer. X manages a well-diversified portfolio with time-varying

Question 4 (40 points) Q4 (40 points): In a single-factor world, manager X is a Henrikkson-Merton market timer. X manages a well-diversified portfolio with time-varying beta, adjusting portfolio beta monthly in response to own market forecast for the next month. X's forecasts of market direction over the next month are always correct, so X is a perfect timer. However, X is not a pure timer because X sets the portfolio beta to BYH = 0.5 in response to a forecast of a bull market month, and to XL = 0 in response to a forecast of a bear market month. Also, please note that X is not pursuing selection, so dy = 0. You have invested $100,000 in manager X's portfolio over the past three-month period. Throughout the period, the risk-free rate has been rf = 0.01 1%. Market excess returns for the three months have been E(RM. 1) = 0.02 = 2%, E(RM,2) = 0.04 =-4%, and E(RM3) = 0.06 = 6%. Right now, at the end of the three-month period, your osition in manager X's fund is (rounded to the nearest dollar): $111,312 $106,904

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