View the step-by-step solution to:

After "improving on the market" in the question above, the analyst identifies another stock believed to be mispriced.

1. After “improving on the market” in the question above, the analyst identifies another stock believed to be mispriced. Since the investor was fortunate to have studied FIN 510 at TAMU-Commerce and had learned that CAPM as typically expressed against the market no longer applies once the portfolio has been altered, rather than recomputing the betas against the new portfolio the analyst decides to switch to the single-index model approach. But that model involves estimates of alpha and the standard deviation of the error term. From the information provided above, those values are computed as ______% and ______%, respectively.

2. A CFA wishes to determine the optimal weights of a portfolio consisting of two ETFs, one for the market and another for a high-beta industry. The CFA projects risk premiums of 10% for the market and 16% for the industry. He expects the standard deviation for the market to be 18%. Regression analysis computes a 1.5 beta for the industry ETF and a standard deviation of the error term of 13%. He believes both are reasonable to assume for the investment period ahead. Based on these forecasts, the weights in the risky portfolio should be ______% in the industry and ______% in the market.

3. The CFA in the preceding problem identifies another sector ETF that he believes is mispriced. This one has a .75 beta, the standard deviation of the error term is 17%, and in his opinion a 9% risk premium will be achieved. Adding these forecasts to those above, the optimal weights in the risky portfolio would be ______% in the high-beta ETF, ______% in the low beta one, and ______% in the market.

Recently Asked Questions

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question