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  #41  
Old 05-06-2017, 12:17 PM
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The weights didn't add up to one, but sometimes the intent of the question doesn't make sense. So we just roll with it and hope we succeed in the end.
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  #42  
Old 05-06-2017, 12:18 PM
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Anyone knows how to contrast and compare the optimal risky portfolio predicted by CAPM and Single Index Model?
I could be incomplete here, but I think the main point is that the CAPM portfolio would be that comprised of all assets in the economy while the Single Index Model portfolio would be comprised of a passive index and a group of stocks selected based on their alpha relative to idiosyncratic risk (i.e. Traynor-Black procedure).
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  #43  
Old 05-06-2017, 12:36 PM
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Originally Posted by el_zilcho View Post
I could be incomplete here, but I think the main point is that the CAPM portfolio would be that comprised of all assets in the economy while the Single Index Model portfolio would be comprised of a passive index and a group of stocks selected based on their alpha relative to idiosyncratic risk (i.e. Traynor-Black procedure).
I thought that CAPM was a special case of the single index model. I could be wrong...
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  #44  
Old 05-06-2017, 12:46 PM
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Originally Posted by Colonel Smoothie View Post
I thought that CAPM was a special case of the single index model. I could be wrong...
I think it can be derived from the Single Index Model when investors diversify away individual risk, alphas are competed away, and diversification is pursued until the market portfolio is held.
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  #45  
Old 05-06-2017, 01:42 PM
El_Pistolero El_Pistolero is offline
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I was under the impression that both will arrive at the same conclusion: optimal risky portfolio = market portfolio...

Otherwise these two will contradict each other?
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  #46  
Old 05-06-2017, 02:17 PM
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I stated that single index would be closer since it recognizes the alpha term whereas capm only has beta.
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  #47  
Old 05-06-2017, 06:30 PM
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Quote:
Originally Posted by el_zilcho View Post
I could be incomplete here, but I think the main point is that the CAPM portfolio would be that comprised of all assets in the economy while the Single Index Model portfolio would be comprised of a passive index and a group of stocks selected based on their alpha relative to idiosyncratic risk (i.e. Traynor-Black procedure).
This is basically what I wrote as well.
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  #48  
Old 05-06-2017, 07:35 PM
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I rearranged Ferrari equation to look like a weighted average of I/A and U/R. This gave me my weights to find sigma. The final weight was around the fifties.
I guess I was confused by this question since I got E(r) = 13%, but did not know the correlation between the two, so I didn't think the combined variance was possible to calculate.

I ended up assuming a standard deviation of 10% in order to calculate the y*
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  #49  
Old 05-07-2017, 12:42 AM
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Originally Posted by Adversely Selected View Post
I guess I was confused by this question since I got E(r) = 13%, but did not know the correlation between the two, so I didn't think the combined variance was possible to calculate.

I ended up assuming a standard deviation of 10% in order to calculate the y*
It was given that R = 150 and S =100, right?

T/S = I/A * (1+ R/S) + U/R * R/S
= 2.5*I/A + 1.5*U/R
so Var(T/S) = (2.5*sd_I/A)^2 + (1.5*sd_U/R)^2
where sd was also given.
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  #50  
Old 05-07-2017, 06:37 AM
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Originally Posted by shmiluy View Post
It was given that R = 150 and S =100, right?

T/S = I/A * (1+ R/S) + U/R * R/S
= 2.5*I/A + 1.5*U/R
so Var(T/S) = (2.5*sd_I/A)^2 + (1.5*sd_U/R)^2
where sd was also given.
Agreed. This should be the way. I used 0.675 for I/A and 0.325 for U/R and ended up with very low variance, which is wrong.
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