Risky - 6 points

To answer to the following questions, please make use of the data in tab "Risky" of the Excel file.

1. The most diversifying asset is

2. In the long-only risk parity portfolio, how much should be invested in asset C ?

And what is the volatility of the new portfolio ?

3. For each of the following statements, determine if it is correct or wrong.

i. It is impossible to find a portfolio, which is a risk parity portfolio and an equally weighted portfolio at the same time.

ii. The maximum Sharpe ratio portfolio should also be the risk parity portfolio.

iii. When considering the maximum Sharpe ratio portfolio, the excess return and the implied excess return should coincide.

iv. If you know the capital allocations of the minimum variance portfolio, you should be able to infer the capital allocations of the risk parity portfolio without any additional calculation.

v. If you know the risk budgets of the minimum variance portfolio, you should be able to infer the capital allocations of this portfolio without any additional calculation.

vi. The total risk of a portfolio will always increase if you increase the allocation to the asset with the highest volatility.

vii. The MRC (Marginal Risk Contribution) of the risk free asset might be different from zero depending on the correlation with the other assets in the portfolio.

CAPM - 4 points

To answer to the following questions, please make use of the data in tab "CAPM" of the Excel file.

You have to fill in the table found in the Excel file. We assume that the CAPM is perfectly valid. You don't need any additional data.

Select the correct answers :

Answer 1 :

Answer 2 :

Answer 3 :

Answer 4 : 

Tuhotel - 5 points

1. Your assistant has run a market model (empirical CAPM) regression to analyze the monthly returns of a company called MIRESTO. 

The results are as follows:

Intercept = 0.43% (p-value=0.04)

i. MIRESTO has delivered returns that are

ii. MIRESTO can be considered as

iii. Both regression coefficients are

2. To answer to this question, please make use of the data in tab "Tuhotel" of the Excel file.

Run a regression to estimate the Fama-French coefficients of company TUHOTEL. Given the regression outputs from the Fama-French model, TUHOTEL can be categorized as

3. For each of the following statements, determine if it is correct or wrong.

i. Macro risk factor models are always better than style risk factor models.

ii. Style risk factor models are always better than macro risk factor models.

iii. The R-squared measures whether the model fits well to the observed data.

iv. The R-squared measures whether the constant is necessary or not in the model.

v. Two models with different dependent variables but the same explanatory (independent) variables should have the same R-squared.

vi. In the empirical (regression form) CAPM, the constant is the risk free rate.

4. You are planning to use the following formula for estimating the variance for tomorrow:

You know that the ANNUAL EMWA volatility and DAILY return yesterday were 20% and 1% respectively. Additionally, you know that the DAILY return today is 4%. What is the ANNUAL volatility predicted for tomorrow?