Maria Lwantale
Ashley Harris
Leo Markfort
Fin 416 *€“ Investment Analysis
Professor Singhal
04 June 2013
MARKOVS TRILEMMA
1. Try the following actions and try to understand their consequences:
Suppose that GM has decided to become a diversified conglomerate, much like GE, so that
its correlation with GE will be 0.80 instead of 0.26. Rerun Solver using this new input. What
happens to the weights and to the overall portfolio Sharpe ratio? Why?
Now suppose that GM has decided to focus on automobiles and move away from
anything that GE is doing (both with respect to businesses and markets), so that the
correlation between GE and GM is expected to be as low as *ˆ’0.80. Rerun Solver
using this new input. What happens to the weights and to the overall portfolio Sharpe
Suppose that GEs expected return for the upcoming year is 30% (instead of
41%) and its standard deviation is expected to be 30% (instead of 24%). How
does your portfolio change if you use this new information?
2. Assume again that the correlation between GE and GM is 0.26. Add the following constraints to
the Solver model: (B6>=0; B7>=0; B8>=0) indicating that no shorting is allowed. 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 do the base case, optimal portfolio, and Sharpe ratio change, if shorting is not allowed and
