In: Accounting
You have the following assets available to you for investment:
Asset |
Alpha |
Beta with respect to market index |
Idiosyncratic variance |
1 |
0.02 |
0.9 |
0.33 |
2 |
0.005 |
1.6 |
0.19 |
In addition, there is the market portfolio, which has an expected return of 8.7% and a variance of 0.14, and the riskless asset, which returns 3.1%.
A. Using the index model, what should the weights of Assets 1 and 2 be, assuming the beta of your actively managed portfolio is 1?
B. Assuming the beta of your actively managed portfolio is 1, what proportion of the optimal risky portfolio should be composed of the market portfolio?
Please show work, no excel