inflation rate for each period was 2% in 2014, 4% in 2015, and 1% in 2016. What is the
Your portfolio had real net returns of 5% in 2014, 4% in 2015, and... [Show More] 2% in 2016. The net
1. gross, nominal, compound return of your portfolio over those three years?
2. For a single factor model of returns, given by ri,t = αi + βiFt + ϵi,t, which of the following assumptions do we make?
3. You have a portfolio of risky stocks that realized returns of 1% and 3% for 2017 and 2018. Assuming the risk-free rate was 0.25% during that time period what was the Sharpe ratio of your portfolio?
4. Suppose you estimate the CAPM for asset A using the regression
rA,t+1 − rf = αˆ + βˆ × (rMkt − rf ) + ϵt
and find that αˆ = 0.04, βˆ = 1.25, and σ2 = 0.5. If we assume a risk free rate of rf = 1%, an average market rate of return of µMkt = 7%, and a standard deviation of the market excess return of σˆr r = 0.4, then what fraction of the total variance of the expected excess return for this asset is systematic?
5. Using annual data on stocks returns for Timex, you run the regression
rTimex,t − rf = αTimex + βTimex(rMkt,t − rf ) + εTimex,t
and obtain the following information:
R Square 0.12
Coeﬀicients Standard Error t Stat
Intercept 4.05 15.44 0.26
Market 1.32 0.528 2.50
We decide that the CAPM model does not hold for this stock because .
6. Assume a risky asset has a mean return of µS = 0.05 and volatility of σS = 0.1 and the risk-free asset has a mean return of 0.02. When you work up this morning you had a risk aversion of α = 2, but after reading the news paper you were worried that we were entering a recession and your risk aversion increased to α = 10. Based on the optimal portfolio allocation setting where you have one risky asset and one risk-free asset, what would be the change in your optimal portfolio weight on the risk-free asset from this change in risk aversion?
7. Bonus Question: [5 bonus points] I like portfolio theory because . (Hint: circle any answer for bonus points)
1. Suppose you want to buy $20, 000 worth of LMT on the margin. You use $10, 000 of your own money and borrow $10, 000, at an annual interest rate of 2%, so that your initial margin of 50% satisfies legal requirements.
3-Year Horizon (RStocks − RT-bill)
2. Suppose you use the dividend yield (Dt/Pt) to predict 3-year cumulative excess returns
(RStocks − RT-bill) using the following single factor model
RStocks − RT-bill = α + β × Dt/Pt + ϵt+h
From this estimation you get following results: [Show Less]