Question 4: a) A portfolio management organisation analyses 100 stocks and constructs a mean- variance efficient portfolio using only these 100 securities.) how many estimates of expected returns, variances and covariances are needed to optimise this portfolio? C) If one could safely assume that stock market returns closely resemble a single- index structure, how many estimates would be needed? In light of your answer to the above questions, discuss the advantages and disadvantages of the index model compared to the Markowitz procedure for obtaining an efficient diversified portfolio. (20%) b) A portfolio manager summarises the input from macro and micro forecasters in the following table: Micro Forecasts: Asset Expected Return Beta Residual standard deviation Stock A 20% 1.3 58% Stock B 18% 1.8 71% Stock C 17% 0.7 60% Stock D 12% 1.0 55% Macro Forecasts: Asset Expected Return (%) Standard Deviation (%) T-bills 8% 0% Passive equity portfolio 16% 23% () Calculate the expected excess returns, alpha values, and residual variances for the 4 stocks. (15%) (ii) Construct the optimal risky portfolio that includes the passive equity portfolio and an active portfolio of those 4 stocks. (20%) (iii) Calculate the Sharpe measure for the optimal portfolio. Discuss whether an investor is better off investing in an active portfolio rather than investing all their money in the passive equity portfolio. (15%) c) Discuss the superiority of multifactor models over single factor models in explaining the variation of expected return. Discuss the extent to which the Fama- French Five factor model is a good multifactor model to explain the cross sectional variance of security return. (30%) (Total 100%)