Question

James Anderson is the COO of a leading financial institution. He has asked you, a portfolio manager, to calculate the best combination of assets, stock, bonds, and commodities in the firm's portfolio. James has also provided you with the following information from the firm's financial history.

Three-Asset Portfolio

Stocks

Bonds

Commodities

Expected return E(R)

13,00%

3,00%

4,00%

Variance

218,00%

60,00%

140,00%

Standard deviation

147,65%

77,46%

118,32%

Correlation between stocks and bonds

0,2+(NM/1000)

Correlation between stocks and commodities

0,4+(NM/1000)

Correlation between bonds and commodities

0,7+(NM/1000)

NM is the last two digits of your student ID number.

Given the information above, you are required to produce a report that consists of the following:

a. Calculate all expected returns and standard deviations of all portfolio combinations. Use 10% as the smallest unit of the combination, so for example the first combination will be Stock 100%, Bonds 0%, and Commodities 0%, the second combination will be Stock 90% Bonds 10%, Commodities 0%, and so on (there are 66 possible combinations).(5 marks) b. Plot the efficient frontier for all combinations.(5 marks