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. b) Determine the optimal active portfolio and hence construct the optimal risky portfolio with the compositions.

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 Macro Forecasts Asset Gilts Expected Return (%) StandardDeviation (%) 1 0 Passive equity portfolio 10 6 15