Question
A portfolio manager summarizes the input from the macro and micro forecasters in the following table: Micro Forecasts Asset Expected Return (%) Beta Residual Standard
A portfolio manager summarizes the input from the macro and micro forecasters in the following table:
Micro Forecasts | ||||||||
Asset | Expected Return (%) | Beta | Residual Standard Deviation (%) | |||||
Stock A | 28 | 1.5 | 40 | |||||
Stock B | 22 | 2.0 | 62 | |||||
Stock C | 21 | 0.9 | 51 | |||||
Stock D | 16 | 1.0 | 46 | |||||
Macro Forecasts | |||||||
Asset | Expected Return (%) | Standard Deviation (%) | |||||
T-bills | 8 | 0 | |||||
Passive equity portfolio | 20 | 25 | |||||
a. Calculate expected excess returns, alpha values, and residual variances for these stocks. (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round "Alpha values" to 1 decimal place.)
b. Compute the proportion in the active portfolio and the passive index. (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as decimals rounded to 4 places.)
c. What is the Sharpe ratio for the optimal portfolio? (Do not round intermediate calculations. Enter your answer as decimals rounded to 4 places.)
d. By how much did the position in the active portfolio improve the Sharpe ratio compared to a purely passive index strategy? (Do not round intermediate calculations. Enter your answer as decimals rounded to 4 places.)
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 3.0? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
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