Micro Forecasts Beta Asset Expected Return (%) Residual Standard Deviation (%) Stock A 20 1.00 60 Stock B 18 2.50 40 Macro Forecasts Expected Return (%) Asset 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 15 % 13 % 8% -4.5% Instruction: Enter your answer as a decimal number rounded to two decimal places for residual variances. Residual variance of stock A 0.36 Residual variance of stock B 16 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)? What's the M2 of the optimal portfolio?
Micro Forecasts Beta Asset Expected Return (%) Residual Standard Deviation (%) Stock A 20 1.00 60 Stock B 18 2.50 40 Macro Forecasts Expected Return (%) Asset 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 15 % 13 % 8% -4.5% Instruction: Enter your answer as a decimal number rounded to two decimal places for residual variances. Residual variance of stock A 0.36 Residual variance of stock B 16 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)? What's the M2 of the optimal portfolio?
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 12P
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Need help with B part
Transcribed Image Text:Micro Forecasts
Beta
Asset
Expected Return (%)
Residual Standard Deviation (%)
Stock A
20
1.00
60
Stock B
18
2.50
40
Macro Forecasts
Expected Return (%)
Asset
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
15 %
13 %
8%
-4.5%
Instruction: Enter your answer as a decimal number rounded to two decimal places for residual variances.
Residual variance of stock A
0.36
Residual variance of stock B
16
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)?
What's the M2 of the optimal portfolio?
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