21.index_short_sales

21.index_short_sales - University of California, Los...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: University of California, Los Angeles Department of Statistics Statistics C183/C283 Instructor: Nicolas Christou Short sales allowed, risk free asset exists Single index model - Ranking stocks The calculation of optimal portfolios is simplified by using the single index model to rank securities based on the excess return to beta ratio defined as follows: Excess return to beta = R i- R f i . After stocks are ranked using the above ratio the optimum portfolio (point of tangency) consists of investing in all stocks: Those for which the excess return to beta is greater than the cut-off point C * will be held long. Those for which the excess return to beta is smaller than the cut-off point C * will be held short. This cut-off rate is computed as follows: C * = 2 m N j =1 ( R j- R f ) j 2 j 1 + 2 m N j =1 2 j 2 j . where R j Expected return on stock j . R f Return on a riskless asset. j Change in the rate of return of stock j associated with a 1% change in the market return. 2 m Variance in the market index . 2 j Variance of the error term. Also known as unsystematic risk....
View Full Document

This note was uploaded on 06/02/2011 for the course STATS 183 taught by Professor Nicolas during the Spring '11 term at UCLA.

Page1 / 2

21.index_short_sales - University of California, Los...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online