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What are the expected return and risk for the ProValue fund, based on the expected annual returns for each individual stock in Exhibit 10? Please compare the expected return and risk with current weights shown in Exhibit 8 and those with optimized weights shown in Exhibit 10? How should TAM adjust the portfolio, if at all? - Notice that there are negative weights in the optimized weights in Exhibit 10, which means that TAM has to take short positions to optimize the portfolio. What if the college endowment would not accept short position?
xhibit 10 ProValue Portfolio Model Expected Returns and Optimal Portfolio Weights Column CROC Column D: PII Column E: MRC Column F:ETEC Column G: EGN Column H: USM Column I: BAH Column J: FNF Column K: LPLA Column L: ATO Column M: CNO Stock Model Annual Expected Returns Historical Annualized Standard Deviation 33.00% 35.00% 20.00% 30.00% 22.00% 19.00% 22.00% 23.00% 24.00% 11.00% 33.00% 52.58% 40.74% 30.26% 49.54% 29 89% 25.45% 45.82% 19.92% 30.25% 14.56% 63.66% Desired Annual Portfolio Retum 23.00% 25.00% 27.00% 15.00% 17,00% 19.00% 21.00% 29.00% 31.00% 33.00% 35.00% -1.2% -20% 6.2% -25.6% 4.9% 43.0% -35.3% -43.9% -20.3% -20.6% Stock ROC PII MRC ETTC EGN USM BAH FNF LPLA ATO CNO -22.5% 9.7% -78.0% 498% 93.4% 49.7% 60.5% -7.9% 5.4% -22.2% -36.1% -22.3% 11.5% -85.2% 49.2% 108.9% 50.3% 48.9% 4.5% -18.8% -370% -22.1% 13.3% -92.5% 48,5% 124.5% 50.9% 37.3% -8.7% 3.7% -15.4% -37.9% -21.9% 15.1% -99.7% 47.9% 140.0% 51.5% 25.7% -9.1% Optimized Security Weights 2.9% 2.1% 1.3% -12.0% -86% -5.2% -38.7% -39.6% -40.4% -21.6% -21.4% -21.2% 16.9% 18.7% 20.5% -106.9% -114.1% -1213% 47.3% 460% 155.6% 171.1% 186.7% 52.0% 52.6% 53.2% 14.1% 2.5% -9.1% -100% -10.4% -1.9% -413% -21.0% 22.3% - 128.5% 45.4% 2022% 538% -20.7% -108% -0.4% 1.5% -42.2% -20.8% 21.1% -135.7% 44.8% 2178% 54.3% -32,3% -11.2% 25.9% - 143.0% 44.2% 233.3% 54.9% -43.9% -11.6% 27.7% -150.2% 43.5% 248.9% 55.5% -55.5% - 12.0% Exhibit 8 ProValue Portfolio Historical Statistics and Current Weights Stock ROC Average Monthly Returns 4.38% Historical Standard Deviation 15.18% Current Weights, 12/2013 9.55% PII MRC ETFC EGN USM 2.55% 1.88% 1.98% 0.46% 11.76% 8.74% 14.30% 8.63% 7.35% 11.16% 7.42% 14.05% 8.75% 8.65% BAH FNF LPLA ATO CNO 3.03% 0.96% 1.97% 1.54% 3.82% 13.23% 5.75% 8.73% 4.20% 18.38% 11.28% 13.26% 1587% 0,00% 0.00% Exhibit 9 ProValue Portfolio Correlations Correlations ROC PII MRC ETTC EGN USM BAH FNF LPLA ATO CNO ROC PII MRC ETFC EGN USM BAH FNF LPLA ATO CNO 1.000 0.784 0.773 0.710 0.540 0.312 0.536 0.485 0.573 0.442 0.654 1.000 0.630 0.553 0.552 0.168 0.551 0352 0.584 0.385 0608 1.000 0.588 0.590 0.234 0.510 0.444 0.460 0.515 0.485 1.000 0.528 0.285 0.585 0.475 0.377 0.453 0.344 1.000 0.357 0.476 0.371 0.386 0.424 0.412 1.000 0.327 0865 0.420 0.308 0.475 1.000 0.298 0.136 0.107 0.379 1.000 0.449 0.436 0.539 1.000 0.25 0.606 1.000 0.333 1.000 xhibit 10 ProValue Portfolio Model Expected Returns and Optimal Portfolio Weights Column CROC Column D: PII Column E: MRC Column F:ETEC Column G: EGN Column H: USM Column I: BAH Column J: FNF Column K: LPLA Column L: ATO Column M: CNO Stock Model Annual Expected Returns Historical Annualized Standard Deviation 33.00% 35.00% 20.00% 30.00% 22.00% 19.00% 22.00% 23.00% 24.00% 11.00% 33.00% 52.58% 40.74% 30.26% 49.54% 29 89% 25.45% 45.82% 19.92% 30.25% 14.56% 63.66% Desired Annual Portfolio Retum 23.00% 25.00% 27.00% 15.00% 17,00% 19.00% 21.00% 29.00% 31.00% 33.00% 35.00% -1.2% -20% 6.2% -25.6% 4.9% 43.0% -35.3% -43.9% -20.3% -20.6% Stock ROC PII MRC ETTC EGN USM BAH FNF LPLA ATO CNO -22.5% 9.7% -78.0% 498% 93.4% 49.7% 60.5% -7.9% 5.4% -22.2% -36.1% -22.3% 11.5% -85.2% 49.2% 108.9% 50.3% 48.9% 4.5% -18.8% -370% -22.1% 13.3% -92.5% 48,5% 124.5% 50.9% 37.3% -8.7% 3.7% -15.4% -37.9% -21.9% 15.1% -99.7% 47.9% 140.0% 51.5% 25.7% -9.1% Optimized Security Weights 2.9% 2.1% 1.3% -12.0% -86% -5.2% -38.7% -39.6% -40.4% -21.6% -21.4% -21.2% 16.9% 18.7% 20.5% -106.9% -114.1% -1213% 47.3% 460% 155.6% 171.1% 186.7% 52.0% 52.6% 53.2% 14.1% 2.5% -9.1% -100% -10.4% -1.9% -413% -21.0% 22.3% - 128.5% 45.4% 2022% 538% -20.7% -108% -0.4% 1.5% -42.2% -20.8% 21.1% -135.7% 44.8% 2178% 54.3% -32,3% -11.2% 25.9% - 143.0% 44.2% 233.3% 54.9% -43.9% -11.6% 27.7% -150.2% 43.5% 248.9% 55.5% -55.5% - 12.0% Exhibit 8 ProValue Portfolio Historical Statistics and Current Weights Stock ROC Average Monthly Returns 4.38% Historical Standard Deviation 15.18% Current Weights, 12/2013 9.55% PII MRC ETFC EGN USM 2.55% 1.88% 1.98% 0.46% 11.76% 8.74% 14.30% 8.63% 7.35% 11.16% 7.42% 14.05% 8.75% 8.65% BAH FNF LPLA ATO CNO 3.03% 0.96% 1.97% 1.54% 3.82% 13.23% 5.75% 8.73% 4.20% 18.38% 11.28% 13.26% 1587% 0,00% 0.00% Exhibit 9 ProValue Portfolio Correlations Correlations ROC PII MRC ETTC EGN USM BAH FNF LPLA ATO CNO ROC PII MRC ETFC EGN USM BAH FNF LPLA ATO CNO 1.000 0.784 0.773 0.710 0.540 0.312 0.536 0.485 0.573 0.442 0.654 1.000 0.630 0.553 0.552 0.168 0.551 0352 0.584 0.385 0608 1.000 0.588 0.590 0.234 0.510 0.444 0.460 0.515 0.485 1.000 0.528 0.285 0.585 0.475 0.377 0.453 0.344 1.000 0.357 0.476 0.371 0.386 0.424 0.412 1.000 0.327 0865 0.420 0.308 0.475 1.000 0.298 0.136 0.107 0.379 1.000 0.449 0.436 0.539 1.000 0.25 0.606 1.000 0.333 1.000
