The Scenario: Hypatia Reinhard has just inherited $200,000 and wishes to invest

Question

The Scenario: Hypatia Reinhard has just inherited $200,000 and wishes to invest this sum in the five funds listed below. Funds P1, P3 have a negative correlation coefficient -0.25 and funds P2, P5 a positive correlation coefficient +0.55. All other pairs of funds are uncorrelated. There are no restrictions on short selling and Hypatia has a risk aversion parameter measured to be t = 0.007 units. Determine which investors short sell in this market and which funds they short sell. Are there any funds which no-one will short sell? Hypatia's Optimal Portfolio: Carry out the following computational tasks for Hypatia's optimal portfolio P*. Obtain the dollar investment in each of the five funds and obtain the corresponding ex­pected return and risk of P*. Obtain the mu sigma-plane graphical representation and include (all on the same graph): The five investment funds. The minimum variance and efficient frontiers. Use a t-range |t| LE 0.02 for your display. A plot of 1000 random feasible portfolios satisfying |xi| LE- 2.5 (for each of the 5 funds) and

Explanation / Answer

1)

Security P1,P2,P4 and P5 can be short sold as the returns are very less and the risk is more.

But security P3 can be held as there is high return with manageable return compared to other stocks.

Thus, security P3 need not be sold and can be invested.

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