3. In order to find the Minimum Variance Portfolio (MVP), which constraints do y

Question

3. In order to find the Minimum Variance Portfolio (MVP), which constraints do you include in the Markowitz’s portfolio variance minimization process? Assume no short sale is allowed.

          I) Expected Return = a specified return

          II) The weight on each stock must be greater than or equal to zero

          III) The sum of all weights must add to 100%

a.I only                       b.II and III only           c. I and III                   d.I, II, and III

4. Firm ZXY has $20 mil in Debt, $30 mil in Book Value, $90 mil in Total Asset and a market value of $65 mil. The earning for the year is $8 mil. Its return on capital is

a.16.0%                      b.9.4%                        c.8.89%                      d.5.71%

Explanation / Answer

Answer:

Option d is correct.

A minimum variance portfolio with target expected return equal to 0 and no short sales. The minimum variance portfolio will be 100% invested in the risk-free asset because the portfolio standard deviation can never be below 0. Therefore, The sum of all weights must add to 100%.

Answer 4:

Option c is correct.

Capital employed = Debt + Book Value + Total assets

Capital employed = $20 million + $30 million + $90 million = $140 million

Return on capital = Earnings/Capital employed

Return on capital = $8 million/$90 million

Return on capital = 0.0889 or 8.89%

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