Mean variance portfolio optimization

Rich and his wife Kim are both very interested in having your help to invest their funds, and they will pay you a decent amount for it (and let you all use their complimentary passes to Sugar Bowl and Squaw Valley!). Rich is a chemist (plastics, industrial applications) and works in a large firm located in the Bay Area. His wife has an undergraduate degree in business (University of Virginia, Marketing major), and works for a well-known marketing firm. They have two children (10 and 8 years old), have their retirement needs covered by their 401(k) plans at work, and would like to put together an investment plan. At the moment, they have $150,000 in cash, which they were thinking of investing in real estate. They actually looked into a couple of places (Miami area, and Phoenix). They also have about $175,000 in the Vanguard 500 Index (VFINX), and another $125,000 in a bank savings account. The options they have been considering are: a) Going forward with the real estate investment, and finding some additional mutual funds in which to invest the excess cash. b) Putting together a "big chunk" of funds and investing in individual stocks (target 10 firms). They would like your investment advisory firm to help them with this particular option. They would like to buy a second house (a 2 bedroom condo in Squaw Valley!), but they couldn't possibly take on any more mortgage debt at the moment because they are still paying the mortgage on their only home. They hope that 1) they will go on paying their mortgage on their current house, 2) their salaries and bonuses will not change appreciably during the next 3-5 years, and 3) their stocks will appreciate enough to let them buy an investment home sometime in the future. Before you talk about specific Bay Area companies, they would like you to clarify the following points for them. Please limit your answers to one (long) paragraph. They appreciated your comments about preferred stock and cash-dividend stocks but, because of their very high tax rate, they are not interested in stock income at the moment. 1. The sample Build a sample of security returns for the recommended firms. You will need to a) obtain stock prices, monthly, for at least five years. You may get stock price quotes from http://www.yahoo.com. Then, you use EXCEL to calculate stock returns (see 'returns- calculations" page in the aforementioned spreadsheet). Two formulas commonly used are rt = (pt - pt-1)/ pt-1, and rt = In(pt/pt-1), where In" stands for the natural logarithm. 2. Mean-variance a) Calculate mean-variance risk and return indicators (average returns, variances and covariances). b) Calculate the tangent portfolio (see page "tangent" in ia-meanvar.xls). c) Comment on the results —you decide what merits comment. d) Extra-credit: Calculate some optimal portfolios (short sales, and no short sales) and draw the efficient frontier. (See page "qp-rp" in ia-meanvar.xls). 3. Concentrate on the tangent portfolio for this part. a) Do optimal portfolio weights reflect the fundamentals you have observed? (That is, explain whether companies with strong fundamentals have large optimal portfolio weights). b) In general, do you think portfolio theory is useful? Activate Windows c) In the particular case of your sample (time, economic situation, specific choice of Go to Settings to activate securities), do your think portfolio theory helps? Online - Contact support 12:58 AM 40 11/26/2018 7