Extreme Events – Specimen Question A.5.2
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Question and Answer Summary
A colleague has a client for which the mixed minimum risk
portfolio as per A.5.1(b)
applies. She has invested the client’s portfolio as follows:

Portfolio mix (%)

A1

20

A2

20

A3

20

A4

20

A5

20

(a) You know that
she has also used meanvariance optimisation techniques and adopted the same
expected covariances as you would have done in A.5.1.
What return assumptions might she have adopted when choosing her portfolio mix?
Specify mathematically all possible sets of return assumptions she could have
adopted and still reached this answer.
Answer/Hints
(b) Suppose that she is
just about to adjust her portfolio mix so that it includes no holding in A3 and
with the amounts that were invested in A3 in the above table redistributed
equally between the remaining four asset categories. What return assumptions
might she be adopting when choosing her new portfolio mix? Can you specify
mathematically all possible sets of return assumptions she could have adopted
and still reached this answer?
Answer/Hints
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