Reference no: EM133056175

Pick A Stock, Any Stock

Henry Li is an investment analyst in the investment services area of Soarwest Financial and assigned to Ruth Yancey's account. As an investment advisor, Henry's responsibilities are to make investment recommendations to clients, execute trades on their behalf, and expand the demand for Soarwest financial services by making new contacts and clients. Ruth's account at Soarwest is a portfolio of technology stocks worth $25,000. Her aunt established the account for college tuition, which she will need next year. The overall change in equity prices over the last three years has significantly affected the stock portfolio but, given the near-term need for cash, should have its risk profile adjusted.

"Just add a stock at random," advises Malcolm Winsor, another analyst in the same Soarwest office. "Pick a stock, any stock, and the risk of the portfolio should be lowered. Here, use my darts and throw them at the stock pages pasted on my office wall. It's fun and the client will never know. Just don't let Dimk catch you."To Henry's thinking, there has to be a better way. The risk of Ruth's portfolio should be reduced but Ruth needs to stay in stocks for their expected return. Twenty-five thousand tuition dollars will not buy much education these days. Henry asks Malcolm to excuse him, and he calls Soarwest headquarters for their stock recommendations. Henry knows additional analysis is needed but the recommendations are a starting point.

1. Which method of portfolio selection is used? Explain in details that differentiate between the two strategies.

2. Explain the main characteristics of an efficient portfolio. What does it mean to have a portfolio below the efficient frontier?