Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Suppose you currently have a portfolio of three stocks, A, B, and C. You own 500 shares of A, 300 of B, and 200

image text in transcribed

Suppose you currently have a portfolio of three stocks, A, B, and C. You own 500 shares of A, 300 of B, and 200 of C. The current share prices are $42.76, $81.33, and $58.22, respectively. The expected returns and the covariances are provided in the table below. Expected Return Covariance Stock A 12.00% Stock B 9.40% Stock C 14.00% Stock A 0.09164319 -0.0188809 -0.0022386 Stock B -0.01888085 0.03885393 -0.0005562 Stock C -0.00223864 -0.0005562 0.0080718 1. Compute the expected return of your current portfolio. 2. You want to trade stocks so that your new portfolio's return can be no less than 13% while minimizing new portfolio's risk (standard deviation). There is a 1% fee on selling or trading each stock. For example, if you sell 10 shares of Stock A and buy 5 shares of Stock B, the total dollar amount traded is 10*$42.76+5*$81.33=$834.25 and you have to pay a transaction fee of $8.34. These two transactions generate a net amount of 10*$42.76 - 5*$81.33 - $8.34 $12.61 in cash. You would like this net amount to be always non-negative but no more than $5. Also, you cannot have short position in any stock, i.e., you cannot sell more than what you have. Formulate a nonlinear optimization model with integer constraints that determines the number of shares of each stock to buy and sell.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Effective small business management An Entrepreneurial Approach

Authors: Norman M. Scarborough

10th Edition

132157462, 978-0132157469

More Books

Students also viewed these General Management questions

Question

Question 1 (a2) What is the reaction force Dx in [N]?

Answered: 1 week ago