Table 5
Subject:ManagementPrice: Bought3
Table 5.11 shows data on the returns over five 1-year periods for six mutual funds. A
firm’s portfolio managers will assume that one of these scenarios will accurately reflect
the investing climate over the next 12 months. The probabilities of each of the scenarios
occurring are 0.1, 0.3, 0.1, 0.1, and 0.4 for years 1 to 5, respectively.
a. Develop a portfolio model for investors who are willing to risk a portfolio with a
return no lower than 2%.
b. Solve the model in part (a) and recommend a portfolio allocation for the investor with
this risk tolerance.
c. Modify the portfolio model in part (a) and solve it to develop a portfolio for an investor
with a risk tolerance of 0%.
d. Is the expected return higher for investors following the portfolio recommendations
in part (c) as compared to the returns for the portfolio in part (b)? If so, do you believe
the returns are enough higher to justify investing in that portfolio?
