Business Finance Homework Help

You manage a concentrated equity portfolio of value-oriented stocks. Over the past five years
your portfolio has returned 6.5% p.a. with a beta of .7 and an annualized volatility of 10%. The
equity market benchmark has returned 7.5% p.a. with an annualized volatility of 14%, while the
risk-free rate was 2%.

(i) What was the approximate realized information ratio of your portfolio over this five year
period?

(ii) You mention to your friend your portfolio has generated alpha over the past five years
and he tells you there would be an arbitrage opportunity if you took a 70% short
position in the market and against your portfolio and finance the remaining 30% of your
investment at the risk free rate. Is he correct? Why or why not?