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
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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![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?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F9d604923-3a47-4675-abf7-07332cff4780%2F3c559faa-c3bc-4ad4-b259-372140e75515%2Fpdn47x_processed.jpeg&w=3840&q=75)
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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