An investment adviser is helping a couple plan a retirement portfolio. The adviser has recommended three stocksAllied
Question:
An investment adviser is helping a couple plan a retirement portfolio. The adviser has recommended three stocks—Allied Electronics, Bank United, and Consolidated Computers. Following are the annual return and variance for each stock and the covariance between stocks:
The couple wants a total portfolio return of at least 0.11. Determine the proportion of each stock to include in the portfolio to minimize the overall risk.
Stock Allied Electronics Bank United Consolidated Computers Stock Combination (i, j) A, B A, C B, C Annual Return .14 .10 .12 Covariance 4 .7 .3 Covariance .10 .04 .08
Step by Step Answer:
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Stocks (also known as equities) are securities that represent ownership in a company. They are issued by companies to raise capital, and when an individual buys stocks, they become a shareholder in that company. Investing in stocks can be a way for individuals to potentially earn a return on their investment through dividends and capital appreciation. However, investing in stocks also carries a level of risk, as the value of the stock can fluctuate based on various factors such as the financial performance of the company and general market conditions. For companies, issuing stocks can be a way to raise funds for growth and expansion. When a company goes public by issuing an initial public offering (IPO), it can raise significant capital by selling ownership stakes to the public. Companies can also issue additional stock offerings to raise additional capital as needed.
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