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Identified a mispriced portfolio

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Reference no: EM131179443

Suppose a portfolio manager believes she has identified a mispriced portfolio.

Her security analysis team estimates the index model equation for this portfolio (using the S&P 500 index) in excess return form and obtains the following equation:

RP = 0.0612 + 2.27RS&P500 + eP

Therefore, P has an alpha value of 6.12% and a beta of 2.27.

The manager is confident in the quality of her security analysis but is wary about the performance of the broad market in the near term.

To hedge the market risk, the portfolio manager would buy $200.41 million of the target portfolio, sell $454.93 million of S&P500, and buy $254.52 million of T-bills.

The expected profit is $12.265092 million.

Question: How do we arrive at this expected profit figure?

Reference no: EM131179443

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