Reference no: EM133073932

The spreadsheet Group Report Data.xlsx contains monthly returns on eleven Australian industry portfolios from January 2016 to February 2021. The industry abbreviations are in the table below.

Investor utility is represented by: U = E(R) - ½Aσ2 . There are two investors with different risk aversion coefficients (A). Angela has a risk aversion coefficient of 5 and Boris has a risk aversion coefficient of 2. Investors are able to short-sell each industry throughout the report. Investors are unable to borrow or lend at the risk-free rate except for part 5 of the report. The expected returns per month to be used throughout the report are in the following table. Do not use historical average returns as expected returns. You need to use the historical returns to estimate the covariance matrix.

Industry Abbreviation Expected Return (per month)

Consumer Discretionary COND 0.96%

Consumer Staples CONS 0.83%

Energy ENGY 1.09%

Health Care HC 0.86%

Industrials INDU 0.92%

Information Technology IT 1.00%

Materials MATL 0.87%

Telecom TELE 0.90%

Utilities UTIL 0.80%

Financials FIN 0.90%

Real Estate RE 0.96%

Question: Consider the MATL and HC industries. What is the optimal portfolio for both Boris and Angela that contains these two industries? Discuss what happens to each investor's utility and portfolio risk for this portfolio compared to holding these two industries individually. Will you always reach this conclusion or is specific to these two portfolios?