Assignment 2: Optimal Portfolio Allocation The information on the asset classes used in this assignment can be found in the case study ‘Partners Healthcare’. The questions should be solved using excel. Please send your excel solutions to v. i. [email protected] nl Make sure your answers are clear. Prepare a professional-looking Excel file. Each question is 20 points and presentation is another 20 points. You are supposed to do this assignment in groups of three students. Two investors are considering potential investment opportunities.

Exhibit 3 contains information on expected return and volatility of the asset classes under consideration. The first investor, Veliyana, has a risk aversion of 5 and the second one, Roderick, has a risk aversion of 2. Question 1. Suppose each investor allocates their wealth equally among all of the five risky asset classes and the risk free asset. So they invest 1/6th of their wealth in each. Find the expected return, standard deviation and expected utility for each investor. Compare your results to the case in which each investor invests all their wealth in US Equity.

Comment. Question 2. Suppose the investors are restricted to invest only in US equity and one of the four other risky asset classes. For each investor, find the optimal portfolio allocation in each of the four possible situations. In addition, compute the expected return and standard deviation of the final portfolio, and the expected utility of each investor. Illustrate your results using one nice graph and comment. Question 3. Assume now that the investors are unrestricted. They can invest in any of the five risky assets.

What is the optimal portfolio allocation? NB: There are three ways to do this. 1)If you are good with Excel and Math, you can use the formulas in class to find the exact answer. 2) Simply take 100 (not completely) arbitrary portfolios by changing the proportions invested in each of the 5 assets classes (like done in Exhibit 8). From there you have two routes. 2a. ) The best one is to draw the full frontier (even if it is not the exact one) by taking two portfolios that seems to be closest to the frontier, then apply the formula seen in class. 2b. The not so good one (you will earn less points) is by just picking the best portfolio out of these 100 that you have simulated. Question 4. You have just come across the following article in ‘The Economist’: (http://www. economist. com/node/21528640) If you just read it, would this influence your allocation decision? If so, how? NB: Feel free to do some calculations here as well to illustrate your comments. E. g. you can change some of the input data of the case study and if you set-up your Excel right you will quickly get some nice insights both visually and quantitatively.