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The risk-free rate in the market is 45% and the total return on the Market Portfolio is 10.5%. The risk of the Market Portfolio, measured by its standard deviation is 18%. Stock A is mispriced and has an alpha of 2.1% and a beta of 100. Sock A residuals from the single index model have a standard deviation of 30%. To

The risk-free rate in the market is 45% and the total return on the Market Portfolio is 10.5%. The risk of the Market Portfolio, measured by its standard deviation is 18%. Stock A is mispriced and has an alpha of 2.1% and a beta of 100. Sock A residuals from the single index model have a standard deviation of 30%. To

Essentials Of Investments
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
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The risk - free rate in the market is 45% and the total return on the Market Portfolio is 10.5%. The risk of the Market Portfolio, measured by its standard deviation is 18%. Stock A is mispriced and has an alpha of 2.1% and a beta of 100. Sock A residuals from the single index model have a standard deviation of 30%. To exploit this mispricing you will invest in both Stock A and in the market portfolio. What is the optimal active weight on stock A of the optimal risky portfolio that combines Stock A with the Market Portfolio?
Transcribed Image Text:The risk - free rate in the market is 45% and the total return on the Market Portfolio is 10.5%. The risk of the Market Portfolio, measured by its standard deviation is 18%. Stock A is mispriced and has an alpha of 2.1% and a beta of 100. Sock A residuals from the single index model have a standard deviation of 30%. To exploit this mispricing you will invest in both Stock A and in the market portfolio. What is the optimal active weight on stock A of the optimal risky portfolio that combines Stock A with the Market Portfolio?
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