A Job at East Coast Yachts, Part $2$

You are discussing your $401($k$)$ with Dan Ervin when he mentions that Sarah Brown, a representative from Bledsoe Financial Services, is

visiting East Coast Yachts today. You decide that you should meet with Sarah, so Dan sets up an appointment for you later in the day.

When you sit down with Sarah, she discusses the various investment options available in the company's $401($k$)$ account. You mention to

Sarah that you researched East Coast Yachts before you accepted your new job. You are confident in management's ability to lead the

company. Analysis of the company has led to your belief that the company is growing and will achieve a greater market share in the future.

You also feel you should support your employer. Given these considerations, along with the fact that you are a conservative investor, you are

leaning toward investing $100$ percent of your $401($k$)$ account in East Coast Yachts stock.

Assume the risk$-$free rate is $3\mathrm{.}2$ percent. The correlation between the Bledsoe bond fund and large$-$cap stock fund is $\mathrm{.}15.$ Note that the

spreadsheet graphing and "solver" functions may assist you in answering the following questions.

Considering the effects of diversification, how should Sarah respond to the suggestion that you invest $100$ percent of your $401($k$)$ account

in East Coast Yachts stock?

Sarah's response to investing your $401($k$)$ account entirely in East Coast Yachts stock has convinced you that this may not be $\frac{?}{\text{b}\text{a}\text{r}}($ Page $370)$

the best alternative. Because you are a conservative investor, you tell Sarah that a $100$ percent investment in the bond fund may

be the best alternative. Is it$?$

Using the returns for the Bledsoe Large$-$Cap Stock Fund and the Bledsoe Bond Fund, graph the opportunity set of feasible portfolios.

After examining the opportunity set, you notice that you can invest in a portfolio consisting of the bond fund and the large$-$cap stock fund

that will have exactly the same standard deviation as the bond fund. This portfolio also will have a greater expected return. What are the

portfolio weights and expected return of this portfolio?

Examining the opportunity set, notice there is a portfolio that has the lowest standard deviation. This is the minimum variance portfolio.

What are the portfolio weights, expected return, and standard deviation of this portfolio? Why is the minimum variance portfolio

important?