Question: Problem 3 (20pts). Let 0:5. (a) (10pts). Given N stocks whose random return is 2 RN with mean 2 RN and covariance matrix C 2
Problem 3 (20pts). Let 0:5.
(a) (10pts). Given N stocks whose random return is 2 RN with mean 2 RN and covariance
matrix C 2 RNN. Consider the following portfolio selection problem:
min
w
w>Cw (1)
subject to P(w> R)
w>1 = 1
w 0 (2)
(3)
(4)where w is the portfolio weight, R is the target return rate, and P() is the probability whose
random variable is w>. How can you solve (1) - (4) numerically and efficiently by converting
it into a standard from of mathematical programming mentioned in the lecture (e.g. LP, QP,
SDP, SOCP...)? State any required condition if necessary.
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