A portfolio manager summarizes the input from the macro and micro forecasts in t

Question

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

Residual Standard Deviation (%) Micro Forecasts Asset Expected Return (%) Beta D Stock A 20 1.50 60 Stock B 18 2.00 40 I I Macro Forecasts Asset T-bills Passive Equity Portfolio (m) Expected Return (9%) Standard Deviation (%) 5 0 16 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)? Whats the M2 of the optimal portfolio?

Explanation / Answer

Stock A Stock B Excess returns (Ri - Rf) 15.00% 13.00% Alpha values (calculated below) -1.50% -9.00% Residual variances = Residual standard Deviation ^2 36.00% 16.00% Alpha = Ri - (Rf + beta * (Rm - Rf ) ) Stock A = 20% - (5% + 1.5 x (16% - 5%) -1.50% Stock B = 18% - (5% + 2 x (16% - 5%) -9.00%

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