Note: 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. c) Assume that the investment company uses Fama-French-Carhart alpha to evaluate historical investment performance and awards managers with higher alphas. Suppose that 1) stocks A and B are small-sized stocks and stocks C and D are medium-sized stocks; 2) stocks A and B are neither winners or losers in past 12 months, and stocks C and D are losers in terms of past 12 month returns. Book-to-market information for these stocks is unknown. Given the above information, discuss, without calculations, what adjustments a portfolio manager can make in the above calculations for an improved optimal risky portfolio

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