Reference no: EM132712114

Problem - You are considering investing in the following securities and have developed the probability distributions for their returns over the next year.

		Expected Returns
Economic Outlook	Probability	OMG	BRB	NOOB	T-bills
Recession	0.10	-22%	-7%	12%	3%
Slow growth	0.20	-11%	2%	8%	3%
Average	0.40	11%	5%	3%	3%
Fast growth	0.20	17%	8%	-5%	3%
Boom	0.10	26%	11%	-11%	3%

Required -

a. Calculate the expected return and standard deviation of each security.

b. Create a variance/covariance matrix for the four securities. See Creating a Variance/Covariance Matrix for an example of how to create a formula that uses probabilities instead of historical (equally weighted) data.

c. Using the Solver, create a set of 11 portfolios that make up the capital market line. Create a chart of the CML from your results, and add a plot of the original securities.

d. Find the weights of each security in the market portfolio by maximizing the Sharpe ratio.

e. How does the risk/return trade-off of the original securities compare to that available on the CML?