An investor wants to determine the safest way to structure a portfolio from several investments. Investment A

Question:

An investor wants to determine the safest way to structure a portfolio from several investments. Investment A produces an average annual return of 14% with a variance of 0.025. Investment B produces an average rate of return of 9% with a variance of 0.015. Investment C produces an average rate of return of 8% with a variance of 0.010. Investments A and B have a covariance of 0.00028, and investments A and C have a covariance of - 0.006. Investments B and C have a covariance of 0.00125.

a. Suppose the investor wants to achieve at least a 12% return. What is the least risky way of achieving this goal?

b. Suppose the investor regards risk minimization as being five times more important than maximizing return. What portfolio would be most appropriate for the investor?

Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...