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Pat McCormack, a financial advisor for Investors R Us, is evaluating two stocks in a...

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Accounting

Pat McCormack, a financial advisor for Investors R Us, is evaluating two stocks in a particular industry.

He wants to minimize the variance of a portfolio consisting of these two stocks, but he wants to have an expected return of at least 9%.

After obtaining historical data on the variance and returns, he develops the following nonlinear program.

Minimize portfolio variance = .16X^2 + .2XY +.09Y^2

Subject to X + Y = 1

.11X + .08Y >= .09

Y>= .1(X+Y)

Where X = proportion of money invested in Stock 1 and Y = the porportion of money invested in stock Y.

Solve this using Excel solver and determine how much to invest in each of the two stocks. What is the return for the portfolio? What is the variance of the portfolio?

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