London School of EconomicsFM 300FM300 2018 Final Answer

Ó LSE ST 2018/FM300 Page 1 of 8 Section A Solutions 1. This question is about portfolio management and performance evaluation [25 marks] a) Managers have market timing ability if they can forecast when to be in the equity market and when to be out of the market (hold cash or risk-free asset). b) Model description and the frontier are in LN8. To calculate the weight, first need alpha and beta of the active portfolio. Beta is given by: c) Numerical value of the Sharpe ratio is difficult to interpret, whether it is big or small. The idea is to mix the managed portfolio and T-bills so that the resulting portfolio has the same volatility as the market portfolio. Full definition and construction in the LN8. Let w be the weight of P in the mixed portfolio. It is given by