Portfolio Investment Yield
Please view the attached file.
a. Provide one set of weights for a portfolio of all three assets that will deliver a return of 18%.
b. Show graphically and explain briefly how you would find the minimum variance portfolio set that would have an 18% return.
c. Calculate the above set.
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Solution Preview
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a. Provide one set of weights for a portfolio of all three assets that will deliver a return of 18%.
By definition, we know that W3 = 1 - W1 - W2
Then W1*R1 + W2*R2 + W1*R3 = 18%
20% W1 + 12%W2 + 16%(1 - W1 - W2) = 18%
4% W1 - 4% W2 = 2%
4% W1 = 2% + 4% W2
W1 = 0.5 + W2
So any combination of W1 = 0.5 + W2 will satisfy a return of 18%
We can pick up W2 = 0.1, then W1 = 0.5 +0.1 = 0.6, and W3 = 1 - 0.1 - 0.6 = 0.3
So the portfolio of (W1, W2, W3) = (0.6, 0.1, 0.3) will deliver a return of 18%.
b. Show graphically and ...
Solution Summary
The solution displays the full mathematical calculations necessary to demonstrate the calculation for the three assets.