Cathy, a portfolio manager at PS Asset Management, focuses on stock selection in her strategy Her firm uses the CAPM in valuation Her current portfolio mimics the market index She has just received the following forecasts based on private information from her research analysts Asset Expected Return ( ) Stdev ( ) Beta Residual Stdev ( ) Stock X 16 36 0 8 40 Stock Y 19 25 1 8 20 Market Index 16 15 1 Risk free rate 4 0 Given this private information, Cathy wants to apply the Treynor Black (T B) model to create a new optimal risky portfolio from her current portfolio and private information Based on the T B model, compute the optimal weights of constituents of the new optimal risky portfolio (P) Show all computations Compute the expected return and standard deviation of the new optimal risky portfolio (P) that Cathy comes up with using the T B model Show all computations Compute the Sharpe ratio of the new optimal risky portfolio (P) Show all computations Explain to Anabelle, Cathys client, what makes the new optimal risky portfolio (P) from the Treynor Black model better than Cathys current portfolio in terms of risk and return

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Oct 06, 2024

Cathy, a portfolio manager at PS Asset Management, focuses on stock selection in her strategy. Her firm uses the CAPM in valuation. Her current portfolio

Cathy, a portfolio manager at PS Asset Management, focuses on stock selection in her strategy. Her firm uses the CAPM in valuation. Her current portfolio mimics the market index. She has just received the following forecasts based on private information from her research analysts:

Asset	Expected Return (%)	Stdev (%)	Beta	Residual Stdev (%)
Stock X	16	36	0.8	40
Stock Y	19	25	1.8	20
Market Index	16	15	1
Risk-free rate	4	0

Given this private information, Cathy wants to apply the Treynor-Black (T-B) model to create a new optimal risky portfolio from her current portfolio and private information.

Based on the T-B model, compute the optimal weights of constituents of the new optimal risky portfolio (P). Show all computations.

Compute the expected return and standard deviation of the new optimal risky portfolio (P) that Cathy comes up with using the T-B model. Show all computations.

Compute the Sharpe ratio of the new optimal risky portfolio (P). Show all computations.

Explain to Anabelle, Cathys client, what makes the new optimal risky portfolio (P) from the Treynor-Black model better than Cathys current portfolio in terms of risk and return.