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Minoru Asset Management is an Osaka-based asset management company with a mean- variance preference. It fully invests in the Nikkei index, the large-cap index for Tokyo Stock Exchange stocks. Nikkei has an expected return of 9.88% and standard deviation of 27.82%. Minoru is considering adding the Hang Seng index, the stock market index of Hong Kong, into their portfolio. Hang Seng has an expected return of 6.14%, a standard deviation of 19.84%, and a correlation of 0.55 with Nikkei. Suppose the risk-free rate in Japan is 3.3%.
1. Suppose Minoru is interested in improving the Sharpe ratio of the portfolio. Find the investment hurdle rate for Hang Seng. Will Minoru invest a positive amount in Hang Seng?
2. Suppose Minoru invests 90% in Nikkei and 10% in Hang Seng. What is the Sharpe ratio of the 90/10 portfolio? Is it better than that of Nikkei?
3. Assume the Fama-French two-factor model holds. Regressing the 90/10 portfolio return on the world market return and the global HML factor gives betas of 1.1 and -0.5, respectively. Assume that the world equity premium is 6% and the HML premium is 3%. Find the required return and alpha of the 90/10 portfolio using the Fama-French two-factor model.
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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