FIN 533 Homework THIS HOMEWORK ASSIGNMENT IS DUE AT THE BEGINNING OF CLASS ON THURSDAY, FEBRUARY 7.

YOU MUST BE PRESENT TO TURN IN THIS HOMEWORK (AT THE START OF CLASS) IN ORDER TO RECEIVE CREDIT. Given the following: rM = 16%, M = 23%, rf = 8% Stock A B C D E(ri) 20% 18 17 12 1.3 1.8 0.7 1.0 (e) 58% 71 60 55 1.6% -4.4 3.4 -4.0 /2 (e) Ri=E(ri) - rf 0.000476 12% -0.00873 10 0.000944 9 -0.001322 4

We found the following (in class on Tuesday) for our actively managed portfolio when short sales are allowed: A = 16.90% , A = 2.08; (eA) = 147.68% ; wA *= -0.0486; wM *= 1.0486. Sharpe ratio S = 0.3662 1. What would be the composition of the active portfolio if short sales were disallowed? 2. Construct the optimal risky portfolio (that is, what is wA *, wM *, and the weight of the individuals securities in the actively managed portfolio. 3. What is the Sharpe measure for the optimal risky portfolio?