=E*8.6. Reconsider the portfolio selection example, including its spreadsheet model in Figure 8.13, given in Section 8.2. Note in Table 8.2 that stock 2 has the highest expected return and stock 3 has by far the lowest. Nevertheless, the changing cells Portfolio (C14:E14) provide an optimal solution that calls for purchasing far more of stock 3 than of stock 2. Although purchasing so much of stock 3 greatly reduces the risk of the portfolio, an aggressive investor may be unwilling to own so much of a stock with such a low expected return.

For the sake of such an investor, add a constraint to the model that specifies that the percentage of stock 3 in the portfolio cannot exceed the amount specified by the investor. Then compare the expected return and risk (standard deviation of the return) of the optimal portfolio with that in Figure 8.13 when the upper bound on the percentage of stock 3 allowed in the portfolio is set at the following values.

a. 20%

b. 0%