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C. A portfolio has beta () equal to 1, expected return 9%, Jensen's alpha equal to a, idiosyncratic variance Var(), and total variance equal to
C. A portfolio has beta () equal to 1, expected return 9%, Jensen's alpha equal to a, idiosyncratic variance Var(), and total variance equal to 0.11. The risk-free rate (Tp) is 3%, the average return on the market index (E()) is 7%, and the variance of the market index (Var(rm)) is 0.09. The weight a w a(1 B) + (Erm r) Var/var (rw) derived by the Treynor-Black model gives the optimal mix of the portfolio with the market index. According to this model, how much of your wealth should be invested in the portfolio described above, and how much should be invested in the market portfolio? (9 marks)
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