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A portfolio manager summarizes the input from the macro and micro forecasts in the following table Micro Forecasts Asset Expected Return % Beta Residual Standard Deviation

A portfolio manager summarizes the input from the macro and micro forecasts in the following table:

Micro Forecasts

Asset Expected Return (%) Beta Residual Standard Deviation (%)
Stock A

20

1.00

60

Stock B

18

2.50

40

Macro Forecasts

Asset Expected Return (%) Standard Deviation (%)
T-bills

5

0

Passive Equity Portfolio (m)

12

25

a. Calculate expected excess returns, alpha values, and residual variances for these stocks.

Instruction: Enter your answer as a percentage (rounded to two decimal places) for expected excess returns and alpha values.

Expected excess return on stock A %

Expected excess return on stock B %

Alpha of stock A %

Alpha of stock B %

Instruction: Enter your answer as a decimal number rounded to two decimal places for residual variances.

Residual variance of stock A

Residual variance of stock B

Instruction: for part b, enter your response as a decimal number rounded to four decimal places.

b. Suppose that the portfolio manager follows the Treynor-Black model, and constructs an active portfolio (p) that consists of the above two stocks. The alpha of the active portfolio (p) is -18%, and its residual standard deviation is 150%.

What is the Sharpe ratio for the optimal portfolio (consisting of the passive equity portfolio and the active portfolio (p))?

How much of the Sharpe ratio is contributed by the active portfolio?

WhatAc€?cs the M2 of the optimal portfolio?

 

Apr 29 2020 View more View Less

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