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The investment fund Omega has an equity portfolio with a strong tilt towards value stocks, i . e . stocks with low prices relative to
The investment fund Omega has an equity portfolio with a strong tilt towards value stocks, ie stocks
with low prices relative to book values. The investment strategy is based on buying the stocks
with the lowest pricetobook ratios every year and hold these stocks for one year. Over the last
years, on average, this investment strategy return minus riskfree rate of interest has given a
statistically significant abnormal return of alpha The CAPM beta of the portfolio over the same
period was The realized risk premium excess return on the market portfolio was and its
variance was The Rvalue of a regression of the portfolio return on the market portfolio return
is
a Write down the return on the portfolio in terms of a regression equation using the information
you are given in the above text.
b Decompose the variance of the portfolio into a systematic and an unsystematic component.
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