The data for two portfolio L and S are as follows: Expected Return Portfolio L S 10 4 Beta 1.2 0.8 Standard Deviation 25 20 The expected return on the market portfolio =8% and the riskfree rate is 3% and the short rebate is 2%. A long/short fund has $10m in assets under management (AUM). It has a long position of $10m in L. How much of S should it short-sell to construct a portfolio with beta = 0.5. What is the forward looking alpha of this long/short portfolio? "Because the expected return is positive for portfolio S, the expected return on the long/short portfolio is smaller than the expected return on the long only portfolio. Therefore investors would always prefer the long only portfolio to the long/short portfolio." Do you agree? Justify your answer.
The data for two portfolio L and S are as follows: Expected Return Portfolio L S 10 4 Beta 1.2 0.8 Standard Deviation 25 20 The expected return on the market portfolio =8% and the riskfree rate is 3% and the short rebate is 2%. A long/short fund has $10m in assets under management (AUM). It has a long position of $10m in L. How much of S should it short-sell to construct a portfolio with beta = 0.5. What is the forward looking alpha of this long/short portfolio? "Because the expected return is positive for portfolio S, the expected return on the long/short portfolio is smaller than the expected return on the long only portfolio. Therefore investors would always prefer the long only portfolio to the long/short portfolio." Do you agree? Justify your answer.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A4
Transcribed Image Text:The data for two portfolio L and S are as follows:
Expected
Standard
Deviation
Portfolio
Beta
Return
L
10
1.2
4
0.8
20
The expected return on the market portfolio =8% and the riskfree rate is 3% and the short rebate is 2%.
A long/short fund has $10m in assets under management (AUM). It has a long position of $10m in L. How much of S should it
short-sell to construct a portfolio with beta = 0.5.
What is the forward looking alpha of this long/short portfolio?
"Because the expected return is positive for portfolio S, the expected return on the long/short portfolio is smaller than the
expected return on the long only portfolio. Therefore investors would always prefer the long only portfolio to the long/short
portfolio." Do you agree? Justify your answer.
25
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