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Unformatted text preview: MGT 337 Mid-term #2 (2008)solution 1. CAPM / Portfolio Analysis (20 marks) 1.a Thrifty fund is risk-free, so the variance of its returns is 0. No other portfolio can have a lower variance, so the Minimum Variance Portfolio will assign the weight of 100% to Thrifty and 0% to Ponzi. (You could get the same answer by using the formula derived in class. In that case you will also need to notice that the covariance between Thrifty and Ponzi is zero.) 1.b 0.5125. ) , cov( ) , ( 0.05248, 16 . 05 . 2 ) , cov( ) , cov( 2 2 = = = = = Ponzi market market Ponzi market Ponzi market Ponzi market market Ponzi Ponzi R R R R corr R R R R 1.c Ponzi funds alpha is ( ) 02 . ] [ ] [ = = f market Ponzi f Ponzi Ponzi R R E R R E The alpha is positive and indicates that Ponzi earns 2% more per year than what the CAPM predicts for a portfolio of its risk. Thus, Ponzi fund lies above the SML, which may mean that its manager, Mr. Charles Ponzi, is able to identify underpriced companies. 1.d As we showed in c), Ponzi fund lies above the SML, which seems to contradict the CAPM. However, the t-statistic on the funds alpha is only 0.875 (see Excel output in the question), which means that we cannot statistically rejected the hypothesis that the CAPM holds. The seemingly high alpha Charles Ponzi generated may turn out to be only an illusion. (You can read more about Charles Ponzi in an encyclopedia or in your favorite textbook on the history of financial fraud, although that is outside the scope of our course and the midterm.) 2....
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This note was uploaded on 04/26/2011 for the course RSM 332 taught by Professor Raymondkan during the Spring '08 term at University of Toronto- Toronto.
- Spring '08