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All sub-questions a) - l) relate to the following information:

You are of the view that the market is not in a CAPM equilibrium. Therefore, you want to construct an Active Portfolio which, when combined with the Market Portfolio, will be expected to earn a superior Sharpe Ratio then the Market Portfolio alone.

The risk free rate in the market is 3% and the total return on the Market Portfolio is 10%. The risk of the Market Portfolio, measured by its standard deviation, is 11%.

You believe the following 3 assets could form part of your Active Portfolio:

	Stock A	Stock B	Stock C
Beta	0.6	1.1	1.5
Actual Total Return	8.1%	10.7%	15.0%
Total Risk (Standard Deviation)	18.80%	17.50%	21.50%

This question (parts a - l) is worth 14 marks in total.

For each part, if you enter the correct answer you will receive full marks (even if you don't show working). If you choose to show working (either typed into the space provided or as one handwritten PDF file in Question 66), and get the answer incorrect, you may receive part marks. If you simply enter the incorrect answer and do not show working, you will not receive any part marks.

j) Derive the information ratio for the Active Portfolio and provide a description of what the information ratio means. (1.5 marks)

Enter your answer to 3 decimal places eg if your answer is 6.54% enter as 0.065.

k) The optimal weighting in the Active Portfolio w*_A is ____________ and the optimal weighting in the Market Portfolio is ___________? (2 marks)

Enter your answer to 3 decimal places eg if your answer is 6.54% enter as 0.065.

l) What is the Sharpe Ratio of your resulting Optimal Risky Portfolio P* comprising the combination of your Active Portfolio with the Market Portfolio? (2 marks)

Enter your answer to 4 decimal places eg if your answer is 6.54% enter as 0.0654.

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