Question
A stockbroker has received a call from a client who has $500,000 available to invest, this client is considering three potential stocks for this investment
A stockbroker has received a call from a client who has $500,000 available to invest, this client is considering three potential stocks for this investment amount. Stock A is a blue-chip corporation with reasonable growth potential, but more importantly, little risk involved. Stocks B and C are each considerably more speculative, and are considered to have outstanding growth potential, but are also recognized as being very risky. The client would like a return of at least 25% on her investment, but she is also averse to risk. She has instructed the stockbroker to identify the mix of investments in the three stocks that would be appropriate for her.
Stock A currently has a price of $20 per share, while the price of stock B is $30 per share and the price of stock C is $10 per share. After performing his research, the stockbroker has made the following estimates: stock A has an expected return of $4 per share and a variance of return of $4 per share, while stock B has an expected return of $9 per share and a variance of return of $49 per share, and stock C has an expected return of $4 per share and a variance of return of $100 per share. The stockbroker has also estimated the correlation coefficient between the return on each of the two stocks to be as follows: for stocks A and B the correlation coefficient is 0.4, for stocks A and C the correlation coefficient is 0.3, for stocks B and C, the correlation coefficient is 0.75. Formulate an NLP that can be used to identify the minimum-risk investment portfolio that achieves the desired level of expected return.
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