Question

You have identified two securities, A and B, that you believe are mispriced. You have estimated alpha of stock A to be 5%, and the firm specific error term to have a standard deviation of 25%. You estimated alpha of stock B to be -4% and the firm specific error term to have standard deviation of 35%. The market index fund has an expected return of 11% and standard deviation of 15%. The risk-free rate is 5%. What is the Sharpe ratio of the optimal risky portfolio that consist of securities A and B and the market index fund?

Answer #1

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Suppose that the index model for stocks A and B is estimated
from excess returns with the following results:
RA = 2.5% + 0.95RM +
eA
RB = −1.8% + 1.10RM +
eB
σM = 27%;
R-squareA = 0.23;
R-squareB = 0.11
Assume you create a portfolio Q, with investment
proportions of 0.50 in a risky portfolio P, 0.30 in the
market index, and 0.20 in T-bill. Portfolio P is composed
of 60% Stock A and 40% Stock B.
What...

1) You are a fund manager considering two risky assets that have
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a standard deviation of 21%, a bond fund with an expected return of
7% and a standard deviation of 5%, and a T-Bill fund with a return
of 6%.
a) What are the investment proportions of the two risky assets
in the optimal portfolio?
b) What is the expected value of its rate of...

Suppose that the index model for stocks A and B is estimated
from excess returns with the following results:
RA = 3% + 0.7RM+eA RB = -2%+1.2RM+eB R2A= 0.2 R2B = 0.12σM =
20%
For portfolio P with investment proportions of 0.60 in A and
0.40 in B,
a. What is the standard deviation of each stock?
b. Break down the variance of each stock to the systematic and
firm-specific components.
c. What is the covariance between each stock and...

Suppose that the index model for stocks A and B is estimated
from excess returns with the following results:
RA = 3% + 0.7RM+eA
RB = -2%+1.2RM+eB
R2A= 0.2
R2B = 0.12σM = 20%
For portfolio P with investment proportions of 0.60 in A and
0.40 in B,
a. What is the standard deviation of the portfolio?
b. Break down the variance of portfolio to the systematic and
firm-specific components.
c. What is the covariance between portfolio and the market...

A pension fund manager is considering three mutual funds. The
first is a stock fund, the second is a long term government and
corporate bond fund, and the third is a T-Bill money market fund
that yields a sure rate of 4.8%. The probability distributions of
the risky funds are:
expected return standard deviation
Stock Fund ( S )---------18%-------------38%
Bond Fund ( B )----------9----------------32
the correlation between the fund returns is .13
Standard deviation of optimal risky portfolio is 30.92%....

Assume that you manage a risky portfolio with an expected rate
of return of 15% and a standard deviation of 30%. The T-bill rate
is 5%. Your client chooses to invest 120% of a portfolio in your
fund and -20% in a T-bill money market fund.
a. Suppose your risky
portfolio includes the following investments in the given
proportions:
Stock A 30%
Stock B 50%
Stock C 20%
What are the investment proportions of
your client’s overall portfolio, including the...

You are given some information about two mutual funds: Fidelity
Magellan (FMAGX) and T Rowe Price Health Sciences Fund (PRHSX).
Fund Average return Standard deviation Beta FMAGX 1% 2% 0.5 PRHSX
1.5% 2.5% 0.8 The S&P500 made an average of 2% per month over
the same period. The risk free rate was zero throughout. (a)
Calculate the Sharpe ratio and alpha of each fund (b) Assume that
each fund will continue to have the same Sharpe ratio and alpha
going...

Suppose that the index model for stocks A and B is estimated
from excess returns with the following results:
RA = 4.5% + 1.40RM +
eA
RB = –2.2% + 1.70RM +
eB
σM = 24%;
R-squareA = 0.30;
R-squareB = 0.20
Assume you create a portfolio Q, with investment
proportions of 0.50 in a risky portfolio P, 0.30 in the
market index, and 0.20 in T-bill. Portfolio P is composed
of 60% Stock A and 40% Stock B.
a....

You are considering making additional investments, and have
gathered data about
two risky stocks:
Stock: CVX
Expected Return: 11.5%
Beta: 1.10
Firm-Specific Standard Deviation: 24%
Stock: Forsythe Inc.
Expected Return: 16%
Beta: .75
Firm-Specific Standard Deviation: 28%
Assumptions: The expected market return (as measured by the
S&P 500 Index) is 10%. The
standard deviation of the S&P 500 Index is 15%.
a. Calculate the standard deviation of CVX.
b. Calculate the standard deviation of Forsythe.
c. Calculate the covariance between...

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uncorrelated.
a. What is the expected return on the mutual
fund? 11.39
b. What is...

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