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4.corner portfolio

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Published in: Business, Economy & Finance

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Transcript

  • 1. Steps(I) Find out the excess return to beta ratio(II) Rank them from highest to lowest(III) Proceed to calculate c for all the stocks according to the ranked order using the formula. σ²m Σ(Ri– Rf ) x βi σ²ei C= . 1 + σ²m Σβi² σ²ei(IV) The cumulated value of c start declining after certain point. That stock ratio is cut off ratio.
  • 2. The risk less rate is 5% and marketvariance is 10Security Mean Excess Beta Unsystematic Excess return tonumber return return risk beta (Ri– Rf )/ β Ri– Rf1 19 14 1 20 142 23 18 1.5 30 123 11 6 0.5 10 124 25 20 2 40 105 13 8 1 20 86 9 4 0.5 50 87 14 9 1.5 30 6
  • 3. Security Excess (Ri– Rf ) x βi Σ(Ri– Rf ) x βi βi² Σβi² Cinumber return to σ²ei σ²ei σ²ei σ²ei beta1 14 .7 .7 .05 .05 4.672 12 .9 1.6 .075 .125 7.113 12 .3 1.9 .025 .15 7.604 10 1 2.9 .1 .25 8.295 8 .4 3.3 .05 .3 8.256 8 .04 3.34 .005 .305 8.257 6 .45 3.79 .075 .38 7.90
  • 4. Optimal portfolio with short sales In this we use the last point as cut off point and short sale is done where the result is negative and proportion is calculated as in case of normal portfolio.