Part A. Report the alphas for Apple stock, Oracle stock, and the portfolio of ap

Question

Part A. Report the alphas for Apple stock, Oracle stock, and the portfolio of apple and oracle, also indicate whether each of these investment alternatives outperformed or underperformed the market index. outperform or underperform? Part B. Report the betas for Apple stock, Oracle stock, and the portfolio of apple and oracle, also indicate whether each of these two stocks is an aggressive stock or a defensive stocks defensive or aggressive? Part C. Report the r-squared values for Apple stock, oracle stock, and the portfolio of apple and oracle from regressing each alternative's annual returns on S&P; 500 returns Part D. Calculate the weighted average alpha, weighted average beta, and weighted average r-squared value of 70% apple's r-squared value and 30% Oracle's r-squared value. If the value is different from the portfolio r-squared value reported in Part C, what does that mean?

Explanation / Answer

Beta (portfolio) = [Weight (Stock A) X Beta (Stock A)] + [Weight (Stock B) X Beta (Stock B)] + … + [Weight (Stock n) X Beta (Stock n)]

Alpha = Portfolio Return – Benchmark Portfolio Return

Portfolio Value = $120,000
Market Value of Google in Open Positions: $40,000
Beta of Apple 1.22
Market Value of Apple in Open Positions: $30,000
Beta of Google: 1.13
Weight of Apple: $40,000 / $120,000 = 0.333
Weight of Google: $30,000 / $120,000 = 0.25

Portfolio Beta = [Weight of Apple X Beta of Apple] + [Weight of Google X Beta of Google]
[0.333 X 1.22] + [0.25 X 1.13]
0.40626 + 0.2825
0.68876
Example of Beta Calculation – with long and shorts
Portfolio Value = $120,000
Market Value of Google in Open Positions: $40,000
Beta of Apple 1.22
Market Value of Apple in Open Positions (Short): -$30,000
Beta of Google: 1.13
Weight of Apple: $40,000 / $120,000 = 0.333
Weight of Google: -$30,000 / $120,000 =- 0.25
Portfolio Beta = [Weight of Apple X Beta of Apple] + [Weight of Google X Beta of Google]
[0.333 X 1.22] + [-0.25 X 1.13]
0.40626 - 0.2825
0.12376

Example of Alpha:
Initial Cash: $100,000
Interest Rate Earned on Cash: 3%
Interest on Cash to date: $175
Loan Interest: $50
Open Position Profit/ Loss:
Google: $3,000
Apple: -$2,000
Total Open Position Profit/ Loss: $1,000
Beta of Portfolio: 0.12376
No. of Days since Portfolio Start: 50
Return on Benchmark Index: 2%
Actual Return: ($1,000 + $175 – $50) / $100,000 => 1.125%
Expected Return: (50/365 * 3%) + 0.12376 * [2%-(50/365 * 3%)] => 0.6%
Alpha of Portfolio = 1.125% - 0.6% = 0.525%

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---