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All sub-questions a) - k) relate to the following information: You are of the view that the market is not in a CAPM equilibrium. Therefore,

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All sub-questions a) - k) relate to the following information: You are of the view that the market is not in a CAPM equilibrium. Therefore, you want to construct an Active Portfolio which, when combined with the Market Portfolio, will be expected to earn a superior Sharpe ratio than the Market Portfolio alone. The risk free rate in the market is 3% and the total return on the Market Portfolio is 8%. The risk of the Market Portfolio, measured by its standard deviation, is 11%. You believe the following 3 assets could form part of your Active Portfolio: Stock A Stock B Stock C Beta 0.6 1.1 1.5 6.0% 8.5% 14.0% Forecast Return Expected Risk (Standard Deviation) 18.80% 17.50% 26.50% This question (parts a - k) is worth 14 marks in total. For each part, if you enter the correct answer you will receive full marks (even if you don't show working). If you choose to show working, and get the answer incorrect, you may receive part marks. If you simply enter the incorrect answer and do not show working, you will not receive any part marks. Question 37 Not yet answered Marked out of 1.50 a) Which stock or stocks (A, B and/or C) exhibit alpha, and if so, what is the alpha? (1.5 marks) Enter your answer to 4 decimal places eg if your answer is 6.54% enter as 0.0654. Font family Font size Paragraph Flag question Question 38 Not yet b) Describe where each of the stocks A, B and C would plot in relation to the Security Market Line (on the line, over the line or below the line) (1 mark) answered Marked out of 1.00 Flag Question Font family Font size Paragraph Question 39 c) of the three stocks, which stock or stocks would you include in the Active Portfolio. (0.5 marks) Not yet answered Marked out of Font family Font size Paragraph 0.50 Flag question Question 40 Not yet answered Marked out of 1.00 Flag question d) What is the unsystematic risk (defined by the residual variance) of the stock of stocks that you are including in your Active Portfolio? (1 mark) Enter your answer to 4 decimal places. Font family - Font size Paragraph Question 41 Not yet answered Marked out of 1.50 e) What is the reward to risk ratio of the Active Portfolio? (1.5 marks) Enter your answer to 4 decimal places. Font family Font size Paragraph H Flag question Question 42 Not yet f) What is the reward to risk ratio of the market portfolio? (1 mark) Enter your answer to 4 decimal places. Question 44 Not yet answered Marked out of 1.50 h) Derive the information ratio for the Active Portfolio and provide a description of what the information ratio means, (1.5 marks) Enter your answer to 4 decimal places. Flag Font family Font size Paragraph H question Question 45 Not yet answered Marked out of 2.00 1) What is the Sharpe Ratio of your resulting Optimal Risky Portfolio Po, comprising the combination of your Active Portfolio with the Market Portfolio? (2 marks) Enter your answer to 4 decimal places. Flag Font family Font size Paragraph question Question 46 Not yet answered D) By how much does the Sharpe ratio of the Optimal Risky Portfolio P improve compared to the Sharpe ratio of the Market Portfolio? (1 mark) Enter your answer to 4 decimal places. Marked out of 1.00 Flag Font family - Font size Paragraph question Question 47 Not yet k) If your optimal allocation to risky assets y* is 0.8, what percentage of your optimal complete portfolio would you invest in the Active Portfolio? (1 mark) Enter your answer to 3 decimal places eg if your answer is 6.54% enter as 0.065. answered Marked out of 1.00 Flag question Font family font size Paragraph All sub-questions a) - k) relate to the following information: You are of the view that the market is not in a CAPM equilibrium. Therefore, you want to construct an Active Portfolio which, when combined with the Market Portfolio, will be expected to earn a superior Sharpe ratio than the Market Portfolio alone. The risk free rate in the market is 3% and the total return on the Market Portfolio is 8%. The risk of the Market Portfolio, measured by its standard deviation, is 11%. You believe the following 3 assets could form part of your Active Portfolio: Stock A Stock B Stock C Beta 0.6 1.1 1.5 6.0% 8.5% 14.0% Forecast Return Expected Risk (Standard Deviation) 18.80% 17.50% 26.50% This question (parts a - k) is worth 14 marks in total. For each part, if you enter the correct answer you will receive full marks (even if you don't show working). If you choose to show working, and get the answer incorrect, you may receive part marks. If you simply enter the incorrect answer and do not show working, you will not receive any part marks. Question 37 Not yet answered Marked out of 1.50 a) Which stock or stocks (A, B and/or C) exhibit alpha, and if so, what is the alpha? (1.5 marks) Enter your answer to 4 decimal places eg if your answer is 6.54% enter as 0.0654. Font family Font size Paragraph Flag question Question 38 Not yet b) Describe where each of the stocks A, B and C would plot in relation to the Security Market Line (on the line, over the line or below the line) (1 mark) answered Marked out of 1.00 Flag Question Font family Font size Paragraph Question 39 c) of the three stocks, which stock or stocks would you include in the Active Portfolio. (0.5 marks) Not yet answered Marked out of Font family Font size Paragraph 0.50 Flag question Question 40 Not yet answered Marked out of 1.00 Flag question d) What is the unsystematic risk (defined by the residual variance) of the stock of stocks that you are including in your Active Portfolio? (1 mark) Enter your answer to 4 decimal places. Font family - Font size Paragraph Question 41 Not yet answered Marked out of 1.50 e) What is the reward to risk ratio of the Active Portfolio? (1.5 marks) Enter your answer to 4 decimal places. Font family Font size Paragraph H Flag question Question 42 Not yet f) What is the reward to risk ratio of the market portfolio? (1 mark) Enter your answer to 4 decimal places. Question 44 Not yet answered Marked out of 1.50 h) Derive the information ratio for the Active Portfolio and provide a description of what the information ratio means, (1.5 marks) Enter your answer to 4 decimal places. Flag Font family Font size Paragraph H question Question 45 Not yet answered Marked out of 2.00 1) What is the Sharpe Ratio of your resulting Optimal Risky Portfolio Po, comprising the combination of your Active Portfolio with the Market Portfolio? (2 marks) Enter your answer to 4 decimal places. Flag Font family Font size Paragraph question Question 46 Not yet answered D) By how much does the Sharpe ratio of the Optimal Risky Portfolio P improve compared to the Sharpe ratio of the Market Portfolio? (1 mark) Enter your answer to 4 decimal places. Marked out of 1.00 Flag Font family - Font size Paragraph question Question 47 Not yet k) If your optimal allocation to risky assets y* is 0.8, what percentage of your optimal complete portfolio would you invest in the Active Portfolio? (1 mark) Enter your answer to 3 decimal places eg if your answer is 6.54% enter as 0.065. answered Marked out of 1.00 Flag question Font family font size Paragraph

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