PLEASE PROVIDE A DETAILED STEP-BY-STEP EXPLANATION ON HOW YOU SOLVED EACH STEP O

Question

PLEASE PROVIDE A DETAILED STEP-BY-STEP EXPLANATION ON HOW YOU SOLVED EACH STEP OF THE PROBLEM PLEASE AND THANK YOU!

Problem 5-09 The table below shows data on the returns over five 1-year periods for seven mutual funds. A firm's portfolio managers will assume that one of these scenarios will accurately reflect the investing climate over the next 12 months. The probabilities of each of the scenarios occurring are 0.1, 0.3, 0.1, 0.1, and 0.4 for years 1 to 5, respectively RETURNS OVER FIVE 1-YEAR PERIODS FOR SEVEN MUTUAL FUNDS Mutual Funds Large-Cap Stock Mid-Cap Stock Small-Cap Stock Energy/Resources Sector Health sector Technology Sector Real Estate Sector Planning Scenarios for Next 12 Months Year 1 Year 2 Year 3 Year 4 Year 5 28.3 0.9 6.0 -20.5 29.7 45.7 21.1 35.3 32.3 20.8 25.3 49.1 46.2 20.5 20.0 23.2 22.5 33.9 5.5 21.7 44.0 10.4 49.3 33.3 20.9 77.7 93.1 2.6 -9.3 22.8 -2.5 20.1 5.1

Explanation / Answer

Soln : We have taken the help of Solver in the excel to evaluate the portfolio values.

As there are probabilities given for each year , we have considered the values of each sector in one column

Also, we have taken the return of each sector in different years and evaluate the return of weighted average of each sector and sum up the returns in all year

Now, we have multiplied the probabilities of each scenario with the returns of each year respectively

In a solver, we have kept the value of net/final return as Min. as more risk and more return, so low risk and low return.

Putting conditions like sum of sector weight as 1 and value if of net/final return >= 2% based on that we have varied the weights of each sector in solver to get the result as mentioned in the table.

b) Risk tolerancewould be 0 if we keep the value min in the solver for net/final value We can see the allocation of investment in he weightage field above and expexted return = 5,7857%

Simialrly c) We can have this calculation by keeping the solver with net return value = 2% rather than min. to achieve the solution.

We can see here the difference of small change in return , samll increase in return justifying the increased risk.

Returns Sector Weights Year 1 2 3 4 5 LS 17% 35.30% 20% 28.30% 10.40% -9.30% MS 7% 32.30% 23.20% -0.90% 49% -22.80% SS 0% 20.80% 22.50% 6% 33.30% 6.10% ES 27% 25.30% 33.90% -20.50% 20.90% -2.50% HS 31% 49.10% 5.50% 29.70% 77.70% -24.90% TS 10% 46.20% 21.70% 45.70% 93.10% -20.10% RS 10% 20.50% 44% -21.10% 2.60% 5.10% Total portfolio value 100% 36.288% 49.556% 2.118% 65.288% -48.627% Net/final return 5.7857%

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