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280654531 FINS2624 Week8 Tutorial docx - Portfolio

Management

Portfolio Management (University of New South Wales)

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Fins2624 Portfolio Management Kai Lin(z3411977)

Question1.

E ( r X )−r f =α X + β [ E ( r M )−r f ]
a). α X =E ( r X ) −r f −β [ E ( r M ) −r f ]=12.5 −4 −0.5 ( 16 −4 )=2.5
α Y =E ( r Y )−r f −β [ E ( r M )−r f ]=19 −4 −1.5 ( 16 −4 ) =−3
Hence both assets are mispriced.
b). σ 2ε , X =σ 2X −β 2 σ 2M =0.32−0.52∗0.22=0.08
2 2 2 2 2 2 2
σ ε ,Y =σ Y −β σ M =0.5 −1.5 ∗0.2 =0.16
α X 0.025 α Y −0.03
2
= =0.3125 = =−0.1875
σ ε , X 0.08 σ 2ε , Y 0.16
0.3125
wX= =2.5 wY =1−w X =−1.5
0.3125−0.1875
The portfolio beta β P =2.5∗0.5−1.5∗1.5=−1
The portfolio expected return E ( r P )=2.5∗12.5 ∗−1.5∗19 =2.75
Alpha for the portfolio α P=E ( r P ) −r f −β [ E ( r M ) −r f ]=2.75 −4 + 1 ( 16 −4 )=10.75
2 2 2 2 2 2
Variance for the portfolio: σ P=( w X β X σ M +w Y β Y σ M ) +w X σ ϵ , X +w Y σ ϵ , Y =0.9
Unsystematic risk of the portfolio σ 2ε , P=w2X σ 2ϵ , X +w 2Y σ 2ϵ , Y =0.86
2 2 0.1075 16 −4
w 0P=¿ ( α P /σ ε , P ¿/(( E ( r M )−r f )/σ M )=( )/( )=0.0417
0.86 0.2
2

0
wP 0.0417
w ¿P= 0
= =0.0385
1+w P (1−β P ) 1+0.0417 ( 1+1 )
Hence 3.85% in the risky assets, in which 3.85%*2.5=9.63% in asset X and -5.78% in
asset Y. 96.15% in the market portfolio.
α 2P 0.10752
c). Change in the squared sharpe ratio is = =0.0134
σ 2ε , P 0.86
E ( r M ) −r f 0.16−0.04
d). Sharpe Ratio of the market portfolio: S M = = =0.6
σM 0.2
For the new portfolio sharpe ratio:
I don’t know about the correlation.

Question 2
a). HML is constructed by ranking stocks based on book to market ratios from high to
low. The top 50% of stocks are referred to as high book to market stocks and are
bought in the portfolio whilst the bottom 50% as low book to market stocks and are
sold.
Since the HML return is 4.1%, which is higher than 2.7%. This indicates that the high
book to market stocks is outperforming the low book to market stocks.
b). Not able to conclude anything.
c). SMB does have the highest return, however, we have no information regarding the
risk of this portfolio. A high return may come at the cost of high risk. We can only
determine which portfolio to go for if we have information regarding the risk and then
we can decide the portion of money to be invested in SMB.
d).
E ( r CHEVRON ) =r f + β ( r M −r f ) + β SMB r SMB + β HML r HML + β MOM r MOM =2 +1∗2.7 −0.46∗5 + 0.33∗4.1 −0.4∗1.3 =3.23

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