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A portfolio manager summarizes the input from the macro and micro forecasters in the following table....

A portfolio manager summarizes the input from the macro and micro forecasters in the following table.

Micro Forecasts

Assets

Expected Return (%)

Beta

Residual Standard deviation (%)

Stock A

20%

1.30

58.0%

Stock B

18%

1.80

71.0%

Stock C

17%

0.70

60.0%

Stock D

12%

1.00

55.0%

Macro Forecasts

Asset

Expected Return (%)

Beta

Residual Standard deviation (%)

T-bills

8%

0.00

0%

Passive Portfolio(M)

16%

1

23%
  1. Calculate expected excess returns, alpha values, and residual variances for these stocks.
  2. Construct the optimal risk portfolio, which is composed of risk-free rate, passive market portfolio and active portfolio of Stock A-D.
  3. What is the Sharpe Ratio for the Optimal Portfolio that you find in Part b?
  4. By how much did the position in the active portfolio improve the Sharpe ratio compared to a purely passive index strategy?
  5. What should be the exact components of the complete optimal Portfolio for an investor with a coefficient of risk aversion of 2.8?

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Refer to the below images for the above asked questions , in a detailed solution.

ekkarill92 answered 2 years ago
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