Question

Rajat has $1,000 to invest in three stocks let Si be the random variable representing the annual return on $ 1 invested in stock ‘i’. Thus, if Si = 0.12, $1 invested in stock i at the beginning of a year was worth $1.12 at the end of the year. We are given the following information: E(S1) = 0.14, E(S2) = 0.11, E(S3) = 0.10; var(S1) = 0.20, var(S2) = 0.08, var(S3) = 0.18; cov(S1, S2) = 0.05, cov(S1, S3) = 0.02, cov(S2, S3) = 0.03. Find the portfolio that attains an expected annual return of at least 12% and minimizes the variance of the annual dollar return on the portfolio. Formulate and solve this QPP.

Answer 1