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%
|
58
|
|
stock B
|
18
|
1.8
|
71
|
|
Stock C
|
17
|
1.7
|
60
|
|
Stock D
|
12
|
1.0
|
55
|
|
Macro Forecasts
|
|
Assets
|
Expected Return
|
Standard Deviation (%)
|
|
T-bills
|
8
|
0
|
|
Passive equity portfolio
|
16
|
23
|
a. Calculate expected excess returns, alpha values, and residual variances for these stocks.
b. Construct the optimal risky portfolio.
c. What is Sharpe's measure for the optimal portfolio and how much of it is contributed by the active portfolio?
d. What should be the exact makeup of the complete portfolio for an investor with a coefficient of risk aversion of 2.8?