An investor wants to create a portfolio between 3 different types of stocks that will balance...

Transcribed Image Text:

An investor wants to create a portfolio between 3 different types of stocks that will balance the expected return of the investment with its risk (measured by the variance of the portfolio). Historical returns (as % of the investment) for the last 5 years for each of the three stocks are shown in the following table: Year 1 Stock A Stock B Stock C 15.1 8.2 10.5 Year 2 12.1 8.6 8.4 Year 3 11.2 9.1 11.9 Year 4 13.4 10.3 12.4 Year 5 11.1 8.9 10.1 a) Using Markowitz's mean-variance model, write out the non-linear programming model that would minimize the total risk (variance) while achieving a minimum return of 12%. b) Using Excel's Solver (with the GRG non-linear solution algorithm), what is the optimal solution (i.e., what percentage of the investment should be put into each of the three stocks)? An investor wants to create a portfolio between 3 different types of stocks that will balance the expected return of the investment with its risk (measured by the variance of the portfolio). Historical returns (as % of the investment) for the last 5 years for each of the three stocks are shown in the following table: Year 1 Stock A Stock B Stock C 15.1 8.2 10.5 Year 2 12.1 8.6 8.4 Year 3 11.2 9.1 11.9 Year 4 13.4 10.3 12.4 Year 5 11.1 8.9 10.1 a) Using Markowitz's mean-variance model, write out the non-linear programming model that would minimize the total risk (variance) while achieving a minimum return of 12%. b) Using Excel's Solver (with the GRG non-linear solution algorithm), what is the optimal solution (i.e., what percentage of the investment should be put into each of the three stocks)?

Answer rating: 100% (QA)

SOLUTION a To write out the nonlinear programming model using Markowitzs meanvariance model we need to define the decision variables objective functio... View the full answer