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Activeportfoliomgmt
Activeportfoliomgmt
model)
ri − rf = βi(rm − rf ) + ei
Assumptions:
Objective:
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Suppose we have some mispriced securities, we
can write the index model
rk − rf = αk + βk (rm − rf ) + ek
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2
Cov(rA, rM ) = βAσM
2 = β 2 σ 2 + σ 2(e )
σA A M A
E(rA) = αA + rf + βA[E(rM ) − rf ]
Maximization problem:
rp(w) − rf
max
w σp
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Maximization problem:
rp(w) − rf
max
w σp
Solution
w0
w∗ =
1 + (1 − βA)w0
where
αA/σ 2(eA)
w0 = 2
[E(rM ) − rf ]/σM
α2
Sp2 = SM
2 +( A )
σ 2(eA)
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The above shows that the highest Sharpe ratio
for the risky portfolio can be attained when we
construct an active portfolio which maximizes
the value of αA/σ(eA).
αk /σ 2(eA)
wk = Pn 2
i=1 αi/σ (ei )
rp = α + βprm + ei
2
Cov(rP , rM ) = βpσM
and
V ar(rp) = βp2σM
2 + σ 2(e )
P
Therefore,
2
βpσM
Corr(rp, rM ) = q
βp2σM
2 + σ 2 (e )(σ )
P M
βpσM
Corr(rp, rM ) = q
βp2σM
2 + σ 2(e )
P
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Active Portfolio Selection
CAL
A
P
CML