A portfolio manager summarizes the input from the macro and micro forecasts in the following ta ble:

Question:

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 MACRO FORECASTS Asset Expected Return (%) Standard Deviation (%)

T-bills 8 0 Passive equity portfolio 16 23

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

b. Construct the optimal risky portfolio.

c. What is Sharpe’s measure for the optimal portfolio and how much of it is contributed by the active portfolio? What is the M 2 ?

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