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Practical Management Science
6th Edition
ISBN: 9781337406659
Author: WINSTON, Wayne L.
Publisher: Cengage,
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Chapter 4, Problem 90P
Summary Introduction
To determine: The maximum expected return on the portfolio on the basis of the constraints given.
Linear programming:
It is a mathematical modeling procedure where a linear function is maximized or minimized subject to certain constraints. This method is widely useful in making a quantitative analysis which is essential for making important business decisions.
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Students have asked these similar questions
You are also given the following table of average returns over the last 50 years:
Stocks
T-Bonds
T-Bills
Arithmetic
Geometric
Arithmetic
Geometric
Arithmetic
Geometric
0.118
0.107
0.064
0.058
0.041
0.039
If you were asked to compute the equity risk premium for Steel Products, using the historical
approach, what would your best estimate be?
The largest investor in Steel Products is the owner/founder who owns 20% of the stock. Is she also the
marginal investor in this stock? If your answer is yes write 1 and if your answer is No write 2 in the box.
Portfolio Management If x dollars are invested in a company that controls, say, 30% of the market with five brand-names, then 0.30x is a measure of market exposure and 5x is a measure of brand-name exposure. Now suppose you
are a broker at a large securities firm, and one of your clients would like to invest up to $500,000 in recording industry stocks. You decide to recommend a combination of stocks in four of the world's largest recording companies:
Warner Music, Universal Music, Sony, and EMI. (See the table.)+
Market Share
Number of Labels (Brands)
Warner Music
12%
8
Universal Music
20%
20
Sony EMI
20%
10
15%
15
You would like your client to maximize his total market exposure but limit his brand-name exposure to 7.5 million or less (representing an average of 15 labels or fewer per company), and still invest at least 20% of the total in Universal
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Based on your understanding of portfolio risk, identify whether each statement is true or false.
Statement
True
False
A portfolio’s risk is likely to be smaller than the average of all stocks’ standard deviations, because diversification lowers the portfolio’s risk.
Because of the effects of diversification, the portfolio’s risk is likely to be more than the average of all stocks’ standard deviations.
Portfolio risk will increase if more stocks that are negatively correlated with other stocks are added to the portfolio.
The unsystematic risk component of the total portfolio risk can be reduced by adding negatively correlated stocks to the portfolio.
Chapter 4 Solutions
Practical Management Science
Ch. 4.2 - Prob. 1PCh. 4.2 - Prob. 2PCh. 4.2 - Prob. 3PCh. 4.2 - Prob. 4PCh. 4.2 - Prob. 5PCh. 4.2 - Prob. 6PCh. 4.3 - Prob. 7PCh. 4.3 - Prob. 8PCh. 4.3 - Prob. 9PCh. 4.3 - Prob. 10P
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- Practical Management ScienceOperations ManagementISBN:9781337406659Author:WINSTON, Wayne L.Publisher:Cengage,
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Practical Management Science
Operations Management
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:Cengage,