Panel A: Risk

Parameters
of the
investable
universe
(annualized) DATA GIVEN

SD of Correlation
SD of excess systematic with the
return BETA component SD of residual market index
Market
Index 0.1206 1 0.1206 0 1

WMT
(walmart) 0.1662 0.2095 0.0253 0.1657 0.152

TGT (Target) 0.1925 0.5265 0.0635 0.1833 0.3298

VZ (Verizon) 0.1481 0.2375 0.0286 0.1466 0.1934

T (AT&T) 0.1358 0.2981 0.036 0.1321 0.2648
F (Ford) 0.2546 1.3258 0.1599 0.1999 0.628

GM (General
Motors) 0.2973 1.6613 0.2004 0.2215 0.6739

Panel B:
Correlation
of Residuals DATA GIVEN

WMT TGT VZ T F GM
WMT 1
TGT 0.405 1
VZ 0.089 -0.071 1
T 0.193 -0.007 0.624 1
F 0.095 0.077 -0.23 -0.2 1
GM 0.036 0.175 -0.32 -0.309 0.699 1

Panel C: The
Index Model
Covariance
Matrix

Market Index WMT TGT VZ T

BETA 1 0.2095 0.5265 0.2375 0.2981

Market
Index 1 0.01454436 0.003047043 0.0076576055 0.0034542855 0.004335674
WMT 0.2095 0.0030470434 0.028094846 0.0016042684 0.0007236728 0.000908324
TGT 0.5265 0.0076576055 0.001604268 0.0376306193 0.0018186813 0.002282732
VZ 0.2375 0.0034542855 0.000723673 0.0018186813 0.0223119528 0.001029723
T 0.2981 0.0043356737 0.000908324 0.0022827322 0.0010297225 0.018742874
F 1.3258 0.0192829125 0.00403977 0.0101524534 0.0045796917 0.005748236
GM 1.6613 0.0241625453 0.005062053 0.0127215801 0.0057386045 0.007202855

Panel D:
Macro
Forecast and
Forecasts of
alpha values
market risk
premium 0.06

Market Index WMT TGT VZ T F

Alpha 0 0.015 -0.01 -0.005 0.0075 0.012
Beta 1 0.2095 0.5265 0.2375 0.2981 1.3258
Risk
Premium 0.06 0.02757 0.02159 0.00925 0.025386 0.091548

Panel E:
Computation
of the
Optimal
Risky
Portfolio

Active
Market Index Portfolio A WMT TGT VZ T
Var(residuals
) 0.02745649 0.03359889 0.02149156 0.01745041

Initial w of
each
security
(when sum
of portfolio
weights not
equal to 1) 0.7970858009 0.546318921 -0.29762888 -0.232649468 0.429789329
Initial w of
each
security
(when sum
of portfolio
weights
equal to 1) 1 0.685395375 -0.373396289 -0.291875063 0.539200834

square of
Initial w (for
calculating
portfolio
variance) 0.46976682 0.1394247886 0.0851910521 0.29073754
individual
alphas 0.015 -0.01 -0.005 0.0075

portfolio
alpha 0.0241990659

var(residuals
) 0.02745649 0.03359889 0.02149156 0.01745041

var (portfolio
resiuals) 0.0303594241

Ratio of
E(rm) to
Var(rm) 4.1253104296

Unadjusted
Initial w in
active
portfolio 0.1932183806
individual
betas 0.2095 0.5265 0.2375 0.2981

portfolio
beta 0.6441073941
1-portfolio
beta 0.3558926059

1+ (1-
portfolio
beta)x
unadjusted
initial w in
active
portfolio 1.068764993

Optimal w in
active
portfolio 0.819213408 0.1807865919 0.123910294 -0.067505043 -0.052767098 0.097480281
Var of total
return

Var(m) 0.01454436

Cov(Ri,Rj) =
beta I x beta j
0.028094846 x var (m)

variance of beta^2
total return var(m) +
0.037630619 of security var(ei)

0.022311953
0.018742874
0.065525295

0.089203486
F GM

I do know
that the
covariance
of a variable but the
orange with itself is answers are
means sth its own not quite the
1.3258 1.6613 wrong variance same

0.019282912 0.024162545
0.00403977 0.005062053
0.010152453 0.01272158
0.004579692 0.005738605
0.005748236 0.007202855
0.065525295 0.032034703
0.032034703 0.089203486
 risk
premium =
alpha + beta
x excess
market risk excess return of
premium return of the that is Rm - market +
refers to market (rm) Rf residual

market risk
alpha values beta values premium they ignored
GM are given are given given residual
0.0025
1.6613

0.102178

Overall
F GM Portfolio

0.03996001 0.04906225

indiv alpha
divided by
0.300300225 0.050955674 individual w equals to var(ei) total w
0.376747679 0.063927464

0.141938813 0.004086721

0.012 0.0025

summation
of initial
portfolio weight x
alpha equals to alpha

0.03996001 0.04906225

summation
of (initial
weight)^2 x
var(portfolio var(residuals
residuals) equals to )

Unadjusted portfolio
Initial w in alpha / Var
active (portfolio
portfolio equals to residuals) divided by

1.3258 1.6613

summation
of initial
portfolio weight x
beta equals to beta
 Unadjusted
Optimal w in Initial w in
active active
0.068110929 0.011557228 portfolio equals to portfolio divided by
is just the
summation
of individual w
Ratio of
E(rm) to
Var(rm)
1 + (1-
portfolio
beta) x
unadjusted
initial w in optimal (1-
active w) in market
portfolio index is just 1-w