6. A portfolio management house approximates the return-generating process by a two- factor model and uses two
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6. A portfolio management house approximates the return-generating process by a two- factor model and uses two factor portfolios to construct its passive portfolio. The input table that is constructed by the house analysts looks as follows: Micro Forecasts Asset Expected Return (%) Beta on M Beta on H Residual Standard Deviation (%) Stock A 20 1.2 1.8 58 Stock B 18 1.4 1.1 71 Stock C 17 0.5 1.5 60 Stock D 12 1.0 0.2 55 Macro Forecasts Asset Expected Return (%) Standard Deviation (%) T-bills 8 0 Factor M portfolio 16 23 Factor H portfolio 10 18 The correlation coefficient between the two factor portfolios is .6.
a. What is the optimal passive portfolio?
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