An Investor Is Developing a Portfolio of Stocks $\quad$ $\quad$

question 52

Essay

An investor is developing a portfolio of stocks. She has identified 3 stocks in which to invest. She wants to earn at least 11% return but with minimum risk.
The average return for the stocks is:
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\underline{\text { Annual Return }}$
$\begin{array}{lccc} & \text { A } & \text { B } & \text { C } \\\text { Average } & 10.72 \% & 10.68 \% & 11.87 \%\end{array}$
The covariance matrix for the stocks is:
$$\begin{array} { c r r r } & \text { A } & \text { B } & \text { C } \\\hline \text { A } & 0.00009 & - 0.00009 & - 0.00011 \\\text { B } & - 0.00009 & 0.00032 & - 0.00007 \\\text { C } & - 0.00011 & - 0.00007 & 0.00122\end{array}$$ Let: P_i = proportion of total funds invested in i, i = A, B, C
Formulate the NLP for this problem.

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Definitions:

Return on Equity

A measure of a corporation's profitability relative to stockholders' equity.

Net Income

Net Income is the total earnings of a company after all expenses and taxes have been deducted from revenue.

Shareholders' Equity

The residual interest in the assets of a corporation after deducting liabilities, often referred to as net assets or equity.

Cost of Capital

The necessary rate of gain a company must obtain from its investments to keep its market price constant and attract financial support.