The information on which stocks are evaluated is a series of historical returns, typically compiled on...
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The information on which stocks are evaluated is a series of historical returns, typically compiled on a monthly basis. This history provides an empirical distribution of a stock's return performance. For stock & in the portfolio, the table below summarizes the monthly returns for five stocks over a 2-year period in the late 1990s. Stock National Computer (NCO) National Chemical (NCH) National Power (NPW) National Auto (NAU) National Electronics (NEL) Mean 0.0371 0.0145 0.0118 0.0185 0.0217 In addition, the covariance values for the five stocks are displayed in the fol- lowing table. NCO NCO 0.0110 NCH -0.0004 NPW 0.0000 NAU NEL 0.0019 0.0013 NCH -0.0004 0.0032 -0.0002 0.0002 0.0003 NPW NAU 0.0000 0.0019 -0.0002 0.0002 0.0015 0.0007 0.0007 -0.0002 0.0051 0.0008 NEL 0.0013 0.0003 -0.0002 0.0008 0.0044 (a) Determine the portfolio allocation that minimizes risk (i.c.. portfolio variance) for a portfolio consisting of these five stocks, subject to maintaining an average return of at least 2%. What is the minimum variance? (b) Determine the portfolio allocation that maximizes return for a portfolio consisting of these five stocks, subject to maintaining a variance of at most 0.002. What is the optimal return? (c) Suppose an investor prefers an objective function that combines return and risk, as in the following: Objective = return-2 (risk) (d) What is the optimal allocation for this measure of performance? The information on which stocks are evaluated is a series of historical returns, typically compiled on a monthly basis. This history provides an empirical distribution of a stock's return performance. For stock & in the portfolio, the table below summarizes the monthly returns for five stocks over a 2-year period in the late 1990s. Stock National Computer (NCO) National Chemical (NCH) National Power (NPW) National Auto (NAU) National Electronics (NEL) Mean 0.0371 0.0145 0.0118 0.0185 0.0217 In addition, the covariance values for the five stocks are displayed in the fol- lowing table. NCO NCO 0.0110 NCH -0.0004 NPW 0.0000 NAU NEL 0.0019 0.0013 NCH -0.0004 0.0032 -0.0002 0.0002 0.0003 NPW NAU 0.0000 0.0019 -0.0002 0.0002 0.0015 0.0007 0.0007 -0.0002 0.0051 0.0008 NEL 0.0013 0.0003 -0.0002 0.0008 0.0044 (a) Determine the portfolio allocation that minimizes risk (i.c.. portfolio variance) for a portfolio consisting of these five stocks, subject to maintaining an average return of at least 2%. What is the minimum variance? (b) Determine the portfolio allocation that maximizes return for a portfolio consisting of these five stocks, subject to maintaining a variance of at most 0.002. What is the optimal return? (c) Suppose an investor prefers an objective function that combines return and risk, as in the following: Objective = return-2 (risk) (d) What is the optimal allocation for this measure of performance?
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Financial management theory and practice
ISBN: 978-1439078099
13th edition
Authors: Eugene F. Brigham and Michael C. Ehrhardt
Posted Date:
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