Investment Management: Optimal Portfolio - Assignment Example

Whenever an investor is given the tree portfolios, the investor is likely to prefer the portfolio with a smaller risk. An investor will pursue a high-risk portfolio in a case where he is compensated by returns that are high. On the other hand, an investor in need of high returns will have to accept increased risks. In this respect, the objective would be to maximize the reward to risk ratio (Neubman, 2008). In order to establish the most preferred portfolio from the three, one should find out the number of expected risks and returns that an investor would be willing and able to accept.

The expected returns in a portfolio could be given by W1E(r1) + W2 E(r2), where w1 weights in asset A1 and W” are weights in assets A2. E(r1) is the return expected in asset A1. The table below highlights the three portfolios with their risk and return. The efficient portfolio will have any amount of combined assets. The efficient asset allocation, in this case, would be examined using the two risky assets. For instance, if a proportion worth $1000 is invested in the two companies, Portfolio 1 explains that 50% of $1000 ($500) would be invested in Exxon, and 50% of $1000 ($500) would be invested in McDonald’s.

The return that is expected on this portfolio is an average that is weighted of the return expected on the asset components (Enrick, 2006). The second portfolio explains that 80% of $1000 ($800) would be invested in Exxon and 2o% of 1000 ($200) would be invested. The efficient portfolio will have any amount of combined assets. The efficient asset allocation, in this case, would be examined using the two risky assets. For instance, if a proportion worth $1000 is invested in the two companies, Portfolio 1 explains that 50% of $1000 ($500) would be invested in Exxon, and 50% of $1000 ($500) would be invested in McDonald’s.