FNCE30001 Study Guide - Final Guide: Explained Variation, Expected Return, Standard Deviation
Document Summary
A portfolio manager summarizes the input from the macro and micro forecasters in the following table micro forecasts. I = ri [rf + i (rm rf ) ] A = 20% [8% + 1. 3 (16% 8%)] = 1. 6% B = 18% [8% + 1. 8 (16% 8%)] = 4. 4% C = 17% [8% + 0. 7 (16% 8%)] = 3. 4% D = 12% [8% + 1. 0 (16% 8%)] = 4. 0% Stocks a and c have positive alphas, whereas stocks b and d have negative alphas. To construct the optimal risky portfolio, we first determine the optimal active portfolio. Using the treynor-black technique, we construct the active portfolio: Be unconcerned with the negative weights of the positive stocks the entire active position will be negative, returning everything to good order. With these weights, the forecast for the active portfolio is: = [ 0. 6142 1. 6] + [1. 1265 ( 4. 4)] [1. 2181 3. 4] + [1. 7058 ( 4. 0)]