Sandford Brokers is trying to promote investments in the sharesof two stocks, A and B.
Their quantitative analysts have uncovered the followingfacts:
Stock A has an average return of 7% and a risk of 4%.
Stock B has an average return of 13% and a risk of 24%
The correlation between the returns of the two assets is- 1 (minus one)
The brokerage is approached by a client who is willing toinvestment $ 11 million in a portfolio consisting of only these twostocks.
His only condition is that he wants a guaranteed returnon his investment with no uncertainty.
As the Head Trader of Boutique Brokers your task is to:
Either give the client a watertight explanation as to why hiscondition cannot be satisfied
Or
Give him an investment strategy which shows how much to investin each stock as well the guaranteed return he will get.
In either case, you will need to accompany your recommendationwith all relevant deductions, calculations and graphs.
