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Suppose that the market expected return is 10% with standard deviation of 20%. Assume further the risk-free rate is 5%. You are considering an active investment strategy (call it "A"). Your analysis indicates that A has an expected return of 8% with standard deviation 30%. In addition suppose you find that the correlation between the market return and the return to strategy A is 0.3.
(a) What is the beta of strategy A?
(b) How much of the volatility of A is due to systematic risk as measured by market exposure?
(c) What is the alpha of strategy A? Is the market mean-variance efficient? Why or why not?
(d) How would you combine strategy A with the market portfolio to improve on the performance of the market portfolio?
(e) Show how to use strategy A, the market portfolio and the risk-free return to create a portfolio with higher expected return than the market but that matches the risk of the market portfolio.
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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