You initially have a portfolio with 100% allocation to an active fund with active risk of 8% and information ratio of 0.5. You feel it is too risky and thus you now decide to allocate 75% of your capital to this active fund and 25% to the benchmark portfolio instead. Suppose the Sharpe ratio of the benchmark portfolio is 1.2. What will happen to the information ratio of your portfolio after the reallocation?

You initially have a portfolio with 100% allocation to an active fund with active risk of 8% and information ratio of 0.5. You feel it is too risky and thus you now decide to allocate 75% of your capital to this active fund and 25% to the benchmark portfolio instead. Suppose the Sharpe ratio of the benchmark portfolio is 1.2. What will happen to the information ratio of your portfolio after the reallocation?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 7MC: Write out the equation for the Capital Market Line (CML), and draw it on the graph. Interpret the...

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You initially have a portfolio with 100% allocation to an active fund with active risk of 8% and an information ratio of 0.5. You feel it is too risky and thus now decide to allocate 75% of your capital to this active fund and 25% to the benchmark portfolio instead. Suppose the Sharpe ratio of the benchmark portfolio is 1.2 what will happen to the information ratio of your portfolio after the reallocation? Decrease Insufficient information to determine the answer Increase Remain unchanged
Write out the equation for the Capital Market Line (CML), and draw it on the graph. Interpret the plotted CML. Now add a set of indifference curves and illustrate how an investors optimal portfolio is some combination of the risky portfolio and the risk-free asset. What is the composition of the risky portfolio?
Assume a Portfolio of two assets A and B whose standard deviations of their returns are 8.6% and 10.8% respectively, while their correlation coefficient of returns is Pas= - 0.61. You are given the right to do portfolio optimization without restrictions. What proportions would you choose and why?
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Using the information provided in the pictures: Let’s assume, you want to construct a portfolio of risky and riskfreeassets. You wish to generate a 7% return for your complete portfolio E(rc). Using the Capital AllocationLine (CAL) equation - E(rc) = rf + y(E(Rp) - rf)a. Calculate the portion that you need to invest in risky assets and (b). in risk-free assets.c. Calculate the standard deviation of the portfolio.
(Portfolio VaR) Suppose there are two investments A and B. Either investment A or B has a 4.5% chance of a loss of $15 million, a 2% chance of a loss of $2 million, and a 93.5% change of a profit of $2 million. The outcomes of these two investments are independent of each other.
Suppose that you have access to two funds. Fund 1 has a ČAPM beta of 0.4, Fund 2 has a CAPM beta of 1.9. Fund 1 has an average return of 8.5% and Fund 2 has an average return of 10.5%. The riskless rate is 5% and the market risk premium is 7%. You would like to construct a Betting-against-Beta (BaB) strategy by levering up Fund 1 and delevering Fund 2 so that both have a beta of 1.75. Assume that you can borrow and lend at the riskless rate. What is the expected return on the zero-cost strategy long in levered Fund 1 and short in delevered Fund 2? A.8.00% B.4.39% C.2.93% D.10.25%
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Consider the following information about a risky portfolio that you manage and a risk-free asset: E(rp) = 16%, Op = 26%, rf = 4%. a. Your client wants to invest a proportion of her total investment budget in your risky fund to provide an expected rate of return on her overall or complete portfolio equal to 6%. What proportion should she invest in the risky portfolio, P, and what proportion in the risk- free asset? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Risky portfolio Risk-free asset b. What will be the standard deviation of the rate of return on her portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Standard deviation % % O First client O Second client % c. Another client wants the highest return possible subject to the constraint that you limit his standard deviation to be no more than 12%. Which client is more risk averse?
. Write out the equation for the Capital Market Line(CML), and draw it on the graph. Interpret theplotted CML. Now add a set of indifference curvesand illustrate how an investor’s optimal portfoliois some combination of the risky portfolio and therisk-free asset. What is the composition of the riskyportfolio?