• Add a new stock, Stock 4, to the portfolio optimization problem. Stock 4 has an estimated mean and standard deviation of return of 0.125 and 0.175, respectively. Also, assume that the correlations between Stock 4 and the original three stocks are 0.3, 0.5 and 0.8, respectively. Modify the model as needed and have Solver find the new optimal solution. 
• 1a) Stock 4 is relatively risky, with the second highest standard deviation of return. Why is it optimal to invest in Stock 4? 
• 1b) Run a sensitivity analysis (either via SolverTable or manually with Solver, copying and pasting the results as needed) to see how the optimal investment strategy and portfolio standard deviation change as the required mean portfolio return increases from 10% to 14% in increments of 0.5%. Make a scatter plot of the efficient frontier with the portfolio’s required mean return on the y-axis and the standard deviation on the x-axis. Is it possible to find a portfolio whose mean and standard deviation of return are both 13%? 
• 2. (7 pts.) Return to the original portfolio optimization problem with just 3 stocks. Note that all 3 stocks are positively correlated with each other. What happens to the optimal investment strategy and portfolio standard deviation when some of the stocks are negatively correlated with one another? To answer this question, run Solver for the following two cases: 
• 2a) Change the signs of the correlations between stocks 1 and 2 and between stocks 1 and 3 from positive to negative. Thus, stock 1 tends to go in a different direction than stocks 2 and 3. 
• 2b) Change the signs of the correlations between stocks 1 and 2 and between stocks 2 and 3 from positive to negative. Thus, stock 2 tends to go in a different direction than stocks 1 and 3. Organize the results from all three scenarios (original, 2a, and 2b) into a table. For a risk-averse investor, which scenario is the most desirable?    

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1a Stock 4 is relatively risky with the second highest standard deviation of return Why is it optimal to invest in Stock 4 Stock 4 is optimal to inves... View the full answer