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stocks A and C have positive a phas, Whereas stocks B and D …

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stocks A and C have positive a phas, Whereas stocks B and D have negative alphas. NBS8336 Portfolio 2017 sample e… B (en) 692 4,761 (ec) 62 3,844 o (ep) 542 2,916 (25% weighting) b. To construct the optimal risky portfolio, we first determine the optimal active portfolio. Using the Treynor-Black technique, we construct the active portfolio: A 0.004654 0.986752 B -0.00025 -0.05344 c 000052 0.110317 -0.00021 -0.04363 Total 0.004716 1.0000 Be unconcerned with the negative weights of the positive a stocks-the entire active position will be negative, retuming everything to good order. With these weights, the forecast for the active portfolio is: a (0.986752 x 16.20 [-0.05344 x 1.201 10.110317 21 H004363 x 0.6)] 16.30% (0.986752 x 0.8] 0.05344 x 1.21-l0.110317 x 0.50] +0.04363×0.61 0.754254 The high beta (higher than any individual beta) results from the short positions in the relatively low beta stocks and the long positions in the relatively high beta o (e) 10.986752) x3481) H0.05344 x47611 0.110317 38441 H 0.04363 x 2916] 3.455.307 a (e) 58.78% The levered position in B [with high o (e)overcomes the diversification effect and results in a high residual standard deviation. The optimal risky portfolio has a proportion w in the active portfolio, computed as follows: alo (e) 0.162963/3,455.307 0.31442 06/20 IE(ru) The adjustment for beta is: 0.3 l442. 0.2919 The position in the index portfolio is: 1-(0.2919) 0.7081 (25% weighting)

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