Question
Unit: Portfolio Management 11. John Williams has gathered the following information about four individual securities whose active returns are uncorrelated with each other and forecasts
Unit: Portfolio Management
11. John Williams has gathered the following information about four individual securities whose active returns are uncorrelated with each other and forecasts are independent from year to year.
The active return forecasts, active risks and the active weights for each security are show below:
Security | Expected active Return (%) | Active return Volatility (%) | Active weight |
A | 5 | 25 | 18 |
B | 10 | 50 | 9 |
C | -5 | 25 | -18 |
D | 10 | 50 | -9 |
Required:
i). The portfolio weights and the total expected returns for each of the four securities given that the benchmark portfolio for these four securities is equally weighted and that the forecasted return in the benchmark is 10%.
ii). the forecasted total return and active return for the managed portfolio.
iii). the active risk of the managed portfolio.
iv). Verify the basic fundamental law of active management using the expected active return and active risk of the managed portfolio. The individual security active return forecasts and active weights were sized using an information coefficient of 0.20, breadth of 4 and active risk.
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