James is a fund manager working with a long only PMS fund in Malfives. After evaluating the
Question:
James is a fund manager working with a long only PMS fund in Malfives. After evaluating the company, industry and valuation attractiveness, he shortlisted 3 stocks from NSE to constitute his portfolio.
After shortlisting the stocks James was wondering about the portfolio composition. He decided to run a Markowitz optimization program to select the optimum portfolio and arrived at the optimum weights for the stocks A, B and C. After finalizing the portfolio, Sameer found the covariance matrix of the 3 stocks and the optimum portfolio to be the following:
Stock A | Stock B | Stock C | Opt port | |
Stock A | 0.10% | 0.01% | 0.07% | 0.04% |
Stock B | 0.01% | 0.11% | -0.04% | 0.06% |
Stock C | 0.07% | -0.04% | 0.38% | 0.07% |
Opt port | 0.04% | 0.06% | 0.07% | 0.06% |
The expected return of stock A (RA) = 10.0%. The weight of A in the optimum portfolio wA= 19.5%
Assume that risk free rate is 7%.
- Find the expected return of stock B (RB), that of stock C (RC)and that of the optimum portfolio Ropt
- Given the weight of A, find the weights of B and C in the optimum portfolio