Stryker Corporation

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MARKOV’S TRILEMMA

George Markov eagerly awaited his first day at his new job with Athena Asset
Management in a major metropolitan area in the northeastern United States. His future boss had given him a list of questions that would prepare him well for the job. According to the boss:
If you can master these questions, you’ll be well on your way to becoming a portfolio manager! Before attempting those questions, be sure to read carefully
Chapter 8 of Bodie, Kane, and Marcus’s Investments book.
…show more content…
What happens to the weights and to the portfolio Sharpe ratio? How does your portfolio change if you assume a correlation between GE and GM of 0.80 or –0.80?
3. How does the base case optimal-portfolio Sharpe ratio change, if shorting is not allowed and no asset can be allotted more than 50% of the total portfolio?
4. How does your portfolio change if the risk-free rate goes down to 5% from the current
7%? Assume that shorting is not allowed.
5. Replace GE with Intel in your three asset portfolio. You can type over the GE ticker to import Intel’s return and standard deviation. You must manually change the correlation matrix cells that were GE and now are Intel. What happens to the weights and to the portfolio Sharpe ratio? Which three assets would you use if you wanted to achieve maximum diversification, if shorting is not allowed? What if shorting is allowed?
(Choose the appropriate assets without making use of the Excel model.)
6. How would you allocate your wealth between the Treasury bill (risk-free rate) and the optimal portfolio you have computed?
7. How might you use this three asset optimal-allocation model to construct and graph an efficient frontier?

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