A portfolio manager summarizes the input from the macro and micro forecasters in the following table: Macro
Question:
A portfolio manager summarizes the input from the macro and micro forecasters in the following table:
Macro Forecasts Asset Expected Return (%) Standard Deviation (%)
T-bills 8 0 Passive equity portfolio 16 23 Micro Forecasts Asset Expected Return (%) Beta Residual Standard Deviation (%)
Stock A 20 1.3 58 Stock B 18 1.8 71 Stock C 17 0.7 60 Stock D 12 1.0 55
a. Calculate expected excess returns, alpha values, and residual variances for these stocks.
b. Construct the optimal risky portfolio.
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 2.8?
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