Q: Suppose that an investor would like to split $100,000 between Stocks A and Stock B “today” so as to maximize the expected profit “tomorrow” irrespective of the standard deviation of the resulting profit. In other words, suppose that the investor “drops” the constraint on the maximum allowable value of the standard deviation of profits, while keeping the rest of the constraints in the portfolio problem. Which of the following choices describes the optimal portfolio in this case?
or
Q: Assume that, regardless of the standard deviation of the ensuing profit, an investor wishes to divide $100,000 between Stocks A and B “today” in order to optimize the anticipated profit “tomorrow.” Put differently, let’s say that the investor “drops” the restriction on the highest permitted value of the earnings standard deviation while maintaining the remaining limitations in the portfolio problem. In this situation, which option best defines the ideal portfolio?
- XA =100,000, XB = 0
- XA =25,000, XB = 75,000
- XA = 50,000, XB = 50,000
- XA =75,000, XB = 25,000
- XA = 0, XB = 100,000
Explanation: To maximize expected profit without worrying about risk (standard deviation), simply invest entirely in the stock with the higher expected return. If no specific returns are given, the decision remains contingent on the comparison of expected returns for Stocks A and B.
