Practical Management Science
6th Edition
ISBN: 9781337406659
Author: WINSTON, Wayne L.
Publisher: Cengage,
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Chapter 4, Problem 90P
Summary Introduction
To determine: The maximum expected return on the portfolio on the basis of the constraints given.
Linear programming:
It is a mathematical modeling procedure where a linear function is maximized or minimized subject to certain constraints. This method is widely useful in making a quantitative analysis which is essential for making important business decisions.
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You are also given the following table of average returns over the last 50 years:
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T-Bonds
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Arithmetic
Geometric
Arithmetic
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0.118
0.107
0.064
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0.041
0.039
If you were asked to compute the equity risk premium for Steel Products, using the historical
approach, what would your best estimate be?
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Portfolio Management If x dollars are invested in a company that controls, say, 30% of the market with five brand-names, then 0.30x is a measure of market exposure and 5x is a measure of brand-name exposure. Now suppose you
are a broker at a large securities firm, and one of your clients would like to invest up to $500,000 in recording industry stocks. You decide to recommend a combination of stocks in four of the world's largest recording companies:
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Market Share
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Warner Music
12%
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Universal Music
20%
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Sony EMI
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Based on your understanding of portfolio risk, identify whether each statement is true or false.
Statement
True
False
A portfolio’s risk is likely to be smaller than the average of all stocks’ standard deviations, because diversification lowers the portfolio’s risk.
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The unsystematic risk component of the total portfolio risk can be reduced by adding negatively correlated stocks to the portfolio.
Chapter 4 Solutions
Practical Management Science
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