Continuing the previous problem, find the portfolio that achieves an expected monthly re...

Continuing the previous problem, find the portfolio that achieves an expected monthly return of at least 0.01% and minimizes portfolio variance. Then use SolverTable to sweep out the efficient frontier, as in Example 7.9. Create a chart of this efficient frontier from your SolverTable results. What are the relevant lower and upper limits on the required expected monthly return?

(Reference Example 7.9)Perlman & Brothers, an investment company, intends to invest a given amount of money in three stocks. From past data, the means and standard deviations of annual returns have been estimated as shown in Table 7.7. The correlations among the annual returns on the stocks are listed in Table 7.8. The company wants to find a minimum-variance portfolio that yields an expected annual return of at least 0.12.

Objective To use NLP to find the portfolio of the three stocks that minimizes the risk, measured by portfolio variance, subject to achieving an expected return of at least 0.12.

WHERE DO THE NUMBERS COME FROM?

Financial analysts typically estimate the required means, standard deviations, and correlations for stock returns from historical data, as discussed at the beginning of this section. However, you should be aware that there is no guarantee that these estimates, based on historical return data, are relevant for future returns. If analysts have new information about the stocks, they should incorporate this new information into their estimates.