In many cases you can assume that the portfolio return is at least approximately normally distributed. Then you can use Excel’s NORMDIST function as in Chapter 5 to calculate the probability that the portfolio return is negative. The relevant formula is = NORMDIST(0,mean,stdev,1), where mean and stdev are the expected portfolio return and standard deviation of portfolio return, respectively.
a. Modify the portfolio optimization model slightly, and then run Solver to find the portfolio that achieves at least a 0.12 (12%) expected return and minimizes the probability of a negative return. Do you get the same optimal portfolio as before? What is the probability that the return from this portfolio will be negative?
b. Using the model in part a, create a chart of the efficient frontier. However, this time put the probability of a negative return on the horizontal axis.

  • CreatedApril 01, 2015
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