The purpose of this exercise is to provide you with some hands on experience using the Capital Asset Pricing model (CAPM) to perform portfolio selection. Consider the following scenario. It is January 1, 1983. You are an investment advisor to a wealthy client. The client’s name is Ms. Fatcat. Ms. Fatcat is a very wealthy person with a well-diversified portfolio. She is always looking for good advice and is willing to commit $100,000 in your trust to invest on her behalf.
There are several conditions that she imposes:
1) She will evaluate your performance once on January 1 1988.
2) At that time she will evaluate your performance by looking at the Treynor Ratio（特雷诺比率） of your portfolio for the period 1983:1-1987:12 relative to the market. If the portfolio has outperformed the market she will entrust you with an additional $5,000,000 to manage. If the portfolio has under-performed the market she will cut her loses and find another investment advisor.
3) Ms. Fatcat insists on the following rules:
a) Your portfolio will consist of not more than 3 individual stocks.
b) You must choose your stocks from the list of companies on the data list. This data is available to you for the period 1978-1982 on the course homepage in the file capm1.xls.
c) You may not change your portfolio during the evaluation period. The weights of each stock and the choice of stocks included in the portfolio may not change.
Part 1
1) Announce your portfolio. Describe the securities you choose and the weights you give them in your portfolio.
2) Report the means and standard deviations of the returns for each of the companies in your portfolio for the period January 1978-December 1982.
3) Calculate the historical beta and alpha for your portfolio from January 1978- December 1982 By running an OLS regression. Report the standard errors for your estimates of beta and alpha and the R2. Interpret these statistics in words. Test the null hypothesis that your estimated beta is 1.
4) Describe what you expect to happen to the beta and alpha you have estimated in the period over which you will be evaluated: January 1983-December 1987. Explain why.
哇，我正准备考研，向你看齐！
保守点，我还是用夏普指标好了，因为后面其实还有个第五问：
5) Calculate the Treynor Ratio for your portfolio for the period January 1978-December 1982. Do you think this is a good indication of what will happen during your evaluation period? Why or why not?
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