MGFB10H3 Finance Assignment 2: Markowitz Bullet and Portfolio

This finance assignment solution addresses portfolio optimization using the Markowitz bullet approach, analyzing three assets: High Tech, Healthcare, and Utilities. It computes expected returns, standard deviations, and correlations, constructing a covariance matrix. Solver is used to determine optimal portfolio weights under different risk and return targets, including scenarios with short selling. The analysis reveals how investment strategies vary based on risk tolerance and return expectations, highlighting the efficiency of short selling in achieving higher returns at defined risk levels. Desklib provides this and other solved assignments to aid students.

FINANCE
Question 2
Part A
Particular Hi Tech Health Utils
Mean Return 13.8368889 13.6177778 11.238
Standard Deviation 27.3441571 21.4110946 21.7617578
Risk Free Rate 3.50 3.50 3.50
Sharpe Ratio 0.37802917 0.47254837 0.35557789
Part B
The computation of Covariance has been done by using the formula in excel. The same has been
highlighted here-in-below:
Particulars Exp ret Std dev Cor(1,2) Cor(1,3) Cor(2,3)
HiTec 0.14 0.27 0.58 0.50 0.58
Hlth 0.14 0.21
Utils 0.11 0.22
Riskfree 0.04
Covariance matrix
0.0748 0.0342 0.0297
0.0342 0.0458 0.0270
0.0297 0.0270 0.0474
Refer Excel for Solver part
Part C
Refer Excel
Part D
The risk has been taken at 10% for the purpose of solver and on the basis of the same return has
been achieved at 6.63%. Further, the constraint of
The risk has been taken at 10% for the purpose of solver and on the basis of the same return has
been achieved at 6.63%. Further, the constraint of sum of weight =1 has not been applied.
sum of weight =1 has not been applied.
Refer Excel for Solver part
Part E
The return has been taken at 15% for the purpose of solver and on the basis of the same risk has
been achieved at 27.65%. Further, the constraint of sum of weight =1 has not been applied.

Refer Excel for Solver part
Part F
Investment in Asset B and C for Answer D : 1.00
Investment in Asset B and C for Answer E : -2.57
Investment in Asset B and C for Answer B: 3.84
On perusal of the above, it may be inferred that under a low risk investor there is an equal amount
of investment under both utility and health asset. However, for a high return expectation investor
there is a negative investment in the utility asset and a very high investment in the health asset
leading to a return of 15%. Further, under tangency portfolio too there has been given higher
preference to health asset compared to utility asset. Further, the return is lower under the utility
asset with a higher risk compared to health asset.
Thus, the investment under three different scenario are different on account of different investment
objectives.
PART G
An efficient portfolio is one under which maximum return can be achieved for a given level of risk. In
the instant case, the portfolio has reached a return of 15% by short selling utility asset and the
return at a given level of risk of 27.65% has been 15%. On the other hand, the return from Hi tech
has been 13.83% with as risk of 27.35. Thus, the portfolio may be efficient at short sale under certain
situations.Thus it can be seen that short selling can result in an efficient portfolio as seen in part E of
the solution.