Refer to the Markowitz portfolio model, which maximizes expected return subject to a constraint that the variance of the portfolio must be less than or equal to some specified amount:
FS = proportion of portfolio invested in the foreign stock mutual fund
IB = proportion of portfolio invested in the intermediate-term bond fund
LG = proportion of portfolio invested in the large-cap growth fund
LV = proportion of portfolio invested in the large-cap value fund
SG = proportion of portfolio invested in the small-cap growth fund
SV = proportion of portfolio invested in the small-cap value fund
= the expected return of the portfolio
Rs = the return of the portfolio in year s
Use the model to solve a series of models by varying the maximum allowable variance from 20 to 60 in increments of 5 and solving for the maximum return for each (solve a total of nine models). Round your answers to 3 decimal places. If there is no optimal solution, enter “NA” as your answer.
A graph of maximum return versus allowable maximum variance is called the efficient frontier. Based on the nine models you solved, choose the correct efficient frontier, which corresponds to the solution.
Comment on the shape of the efficient frontier.
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