Gilts are bonds that are issued by the British government, and they are generally considered very low-risk investments. Assume that the portfolio manager uses an index model and treats residual standard deviations as firm-specific risks. In addition, the fund prohibits short-selling within the active portfolio. a) Calculate expected excess returns, alpha values, and residual variances for these stocks.

 

Asset Stock A Stock B Stock C Stock D Asset Gilts Passive equity portfolio Micro Forecasts Expected Return (%) 9 7 10 8 Beta 1.2 0.4 1 1.5 Macro Forecasts Expected Return (%) 1 6 TotalStandardDeviation 0 15 (%) 40 StandardDeviation (%) 60 30 50