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Risk and return simulation analysis

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I need help on how to approach this assignment. i have to write a memo after completing the simulation.

Risk and Return Tradeoff Memo

a. Complete the Constructing and Managing a Portfolio simulation

b. Describe the risk-return tradeoff and the relationship between investment strategy and investment performance.

c. Based on your results from the simulation, prepare 1000 word
memo to Rainier Ekstrom, Casa Bonita's Chief Executive Officer (CEO), in which you analyze the risk and return tradeoffs associated with the organization's investment portfolio. Be sure to also address the following in your memo:

1) The decisions you made in the simulation.

2) A brief discussion of how the Sharpe Ratio helps in making investment decisions.

3) Recommendations for changes in the organization's investment strategy in order to improve its investment performance.

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To: Rainier Ekstrom, Casa Bonita's Chief Executive Officer (CEO)
From:
Subject: Portfolio Selection and Investment Strategy
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My first task was selecting 4 stocks with the given information, industry and company specification. I evaluated all the stocks based on the risk and return they stocks offered and also paid attention to the right portfolio diversification to minimize the unsystemic risk. For selecting right stock, I studied the profile of each company to get some industry and company related insights. Some of the stocks like Infoway computers, Transconduit Inc, Desktop Inc, Western Connect Airlines, and One voice telecom.
Investment strategy that Casta Bonita Ceramics decided that it will not invest in very high risk stocks though it would aim to achieve highest return. For that I decide to keep the four selected stocks well diversified. The stocks offering high returns are Infoway Computers, Transconduit Inc, and One Voice Telecom but associated risks are also very high with these stocks. These stocks belong to Information Technology, Information Technology and Telecommunications industry. Out of these three high risk companies, I have given preference to Infoway computers because of it being a large organization, good track record and its strength in comparison to other two companies. This is also ...

Solution Summary

The expert completes, constructs and manages a portfolio simulation. The risk-return trade-off is described. A brief discussion of how the Sharpe Ratio helps in making investment decisions is provided.

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See Also This Related BrainMass Solution

Simulation Problem:
a. Use Crystal Ball to simulate each of the investment combinations to determine the expected return in 3 years. (Note that the formula for the future value, FV, of a current investment, P, with return, r, for n years in the future is FVn = Pr (1 + r)n . Indicate which investment combination has the highest expected return.

b. Erin wants to reduce her risk as much as possible. She knows that if she invests her $100,000 in a CD at the bank she is guaranteed a return of $20,000 after 3 years. Using the frequency charts for the simulation runs in Crystal Ball determine which combination of investments would result in the greatest probability of receiving return of $120,000 or greater.

Solve the following exercise using Crystall Ball. Please refer to the attached word document for the instructions.

Erin Jones has $100,000 and, to diversify, she wants to invest equal amounts of $50,000 each in two mutual funds selected from a list of four possible mutual funds. She wants to invest for a three-year period. She has used historical data from the four funds plus data from the market to determine the mean and standard deviation (normally distributed) of the annual return for each fund, as follows:

Fund µ σ
1. Internet .20 .09
2. Index .12 .04
3. Entertainment .16 .10
4. Growth .14 .06

The possible combinations of two investments are (1,2),(1,3),(1,4),(2,3),(2,4), and (3,4).

a. Use Crystal Ball to simulate each of the investment combinations to determine the expected return in 3 years. (Note that the formula for the future value, FV, of a current investment, P, with return, r, for n years in the future is FVn = Pr (1 + r)n . Indicate which investment combination has the highest expected return.

b. Erin wants to reduce her risk as much as possible. She knows that if she invests her $100,000 in a CD at the bank she is guaranteed a return of $20,000 after 3 years. Using the frequency charts for the simulation runs in Crystal Ball determine which combination of investments would result in the greatest probability of receiving return of $120,000 or greater.
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