CAS Exam 9 Spring 2013, Question 3

Study guide: Exam 9

Given the following information:

The expected risk premium of the market index is 8%.
The standard deviation of the market index is 20%.
A single-factor model is used to construct an optimal risky portfolio with two components:
- i. A passive portfolio containing the market index
- ii. An active portfolio containing some combination of three stocks, with the following estimated parameters:

Stock $_i$	$\alpha_i$	$\sigma^2(e_i)$	$\beta_i$
1	0.06	0.16	0.8
2	0.10	0.20	1.0
3	0.15	0.24	1.2

Calculate the portion of the optimal risky portfolio that is invested in the active portfolio.

Part a (3.25 points)

No current syllabus covers this question; it is kept for the record.