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Below are statistics for portfolio P and the market index. The data is 10-year data and...

Below are statistics for portfolio P and the market index. The data is 10-year data and the data are monthly. Total number of observations is 120.

Performance Measurement

No observations

120

Portfolio P

S&P500

Expected Excess Return

?

1.00%

Standard Deviation total

12.00%

5.00%

Alpha

3.00%

Beta

1.3000

Standard Deviation Residuals (error)

10.00%

M-square

?

General VaR

?

Specific VaR

?

Risk-free monthly basis

0.02%
  1. Making use of the index model, what is the expected excess return for portfolio P?
  2. What is the M-Square for portfolio P?
  3. Identify the VaR that you can diversify.
  4. Identify the VaR that can you hedge in percentage terms?
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Answer #1

Making use of the index model, what is the expected excess return for portfolio P?

Expected Excess Return = Alpha + Beta x Excess return of market + error = 3% + 1.3 x 1% + 0 = 4.3%

What is the M-Square for portfolio P?

Not sure, what is M - square. have never heard of this. Nor anyone else in the word of Finance would have.

I am sure, it must be R-Square.

R?= Bfoi Bou + oʻ(e;)

R square = [1.32 x 0.052] / [1.32 x 0.052 + 0.12] = 0.2970


Identify the VaR that you can diversify.

General VaR = Beta2 x Std dev of market2 = 1.32 x 0.052 = 0.004225 = 0.4225%

Identify the VaR that can you hedge in percentage terms?

Specific Var = Standard Deviation Residuals2 = 0.12 = 0.01 = 1%

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