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You manage a U.S. core equity portfolio that is sector-neutral to the S&P500 Index (its industry sector weights approximately match the S&P 500's). Taking a
You manage a U.S. core equity portfolio that is sector-neutral to the S&P500 Index (its industry sector weights approximately match the S&P 500's). Taking a weighted average of the projected mean returns on the holdings, you forecast a portfolio return of 12%. You estimate a standard deviation of annual return of 22% based on a sample that consists of 100 observations, close to the long-run figure for the S&P 500. For the year-ahead return on the portfolio, assuming Normality for portfolio returns, you are asked to do the following:
- Calculate and interpret a 90% confidence interval for portfolio return.
- What is the probability that portfolio return will exceed 25%?
- You can buy a one-year T-bill that yields 5%. What is the probability that your portfolios return will outperform the risk-free rate?
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