Use the information below to help answer questions 1-2

• Excels solver was used to create the Minimum Variance Frontier (MVF)
• Portfolios 1-6 are all on the MVF
• Portfolios 1-6 were created by weighting Stock W, Stock X, Stock Y, Stock Z
• Portfolios 2-6 are corner portfolios
• The risk free rate is 2%
• All return and risk figures are annualized

1. (Asset Allocation) Which of the following statements is (are) most likely FALSE?

1. When creating this efficient frontier above, it was assumed the portfolio manager cannot short stocks
2. When finding the optimal portfolio, maximize the portfolios return using Excels solver
3. The optimal portfolios Sharpe Ratio is 1.20

1. I
2. II
3. III
4. II & III
5. None of the statements

2. This question is worth 2 points! (Asset Allocation) Your clients current portfolio is $6,250 Stock W and $3,750 Stock Z. To achieve your clients retirement goals, you must increase the return of the existing portfolio by 3.0%. Using the weights in the corner portfolios, which of the following actions (I-IV) would be required

1. Sell $6,250 Stock W
2. Sell $1,750 Stock Z
3. Buy $4,000 Stock X
4. Buy $4,000 Stock Y

1. I
2. II
3. III
4. IV
5. I, II, III, IV

The question is not cut of the slide

Portfolio# SharpeRatio Stock W Stock X Stock Y Stock Z Return 8.0% 15.0% 19.0% 24.0% 29.0% 32.0% Total Risk 18.0% 17.0% 18.0% 20.0% 25.0% 36.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 00% 5.0% 100% 15.0% 20.0% 25.0% 0.0% 35.0% 40.0% Portfolio# SharpeRatio Stock W Stock X Stock Y Stock Z Return 8.0% 15.0% 19.0% 24.0% 29.0% 32.0% Total Risk 18.0% 17.0% 18.0% 20.0% 25.0% 36.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 00% 5.0% 100% 15.0% 20.0% 25.0% 0.0% 35.0% 40.0%