Instructions
Janet Smith is interested in investing in the following set of mutual funds whose returns are normally distributed with the indicated means and standard deviations:
| Fund A | Fund B | Fund C | Fund D | Fund E | |
| Mean | 17.0% | 14.0% | 11.0% | 8.0% | 5.0% |
| Standard Deviation | 9.0% | 6.5% | 5.0% | 3.5% | 2.0% |
Based on historic data, the correlations between the mutual funds are as follows:
| Fund A | Fund B | Fund C | Fund D | Fund E | |
| Fund A | 1 | 0.1 | 0.05 | 0.3 | 0.6 |
| Fund B | 1 | 0.2 | 0.15 | 0.1 | |
| Fund C | 1 | 0.1 | 0.2 | ||
| Fund D | 1 | 0.4 | |||
| Fund E | 1 |
- Assume that Janet is willing to assume the risk associated with a 5% standard deviation on her portfolio. What is the optimal percentage allocation in each fund that will give Janet the maximum expected return for this level of risk? Make sure to copy the Forecast Chart along with the OptQuest Chart within your spreadsheet.
Hints:
a. The decision variables pertain to the proportion Pi that is to be invested in each fund rather than how much to invest in each fund.
b. Each decision variable is bounded by: Pi <=1 and Pi >= 0 (continuous)
c. Make sure that you have a constraint restricting the sum of the Pi‘s = 1
d. Don’t forget to add a “requirement” restricting the standard deviation of the average max returns to be less than or equal to 5%
e. Don’t forget to incorporate the provided correlations among the assumption cells.
f. Don’t forget to adjust your “run Preferences” for OptQuest (e.g., Latin Hyper Cube with 500 runs).
g. Don’t forget to copy the the solution from the OptQuest results window to your spreadsheet.
Get expert help for Mutual fund calulations and many more. 24X7 help, plag-free solution. Order online now!
