B. The table below shows various information for securities C and Z and for the market
index. The alphas reflect security analysis that the manager of a fund has done on these
two securities. The manager wants to hold the market portfolio, but also wants to put
some money in C and Z to reflect her security analysis. Assume that the excess return on
the market portfolio is 6%.
Standard Deviation of
Excess Return
Correlation
with Market
Alphas
Market
0.14
1.00
0.00
C
0.18
0.2
4%
Z
0.22
0.4
-2%
I. Calculate the covariance and betas of C and Z with respect to the market
portfolio.
II.
Calculate the systematic and idiosyncratic variance of C and Z.
III.
Calculate the optimal weight that the manager would assign to the active
portfolio, which is comprised by securities C and Z, and to the market portfolio.