Tina Swan Case Scenario
Tina Swan heads a consulting practice that advises large funds and high-net-worth individuals about portfolio asset allocation and portfolio performance. Swan and two junior advisers, Stephanie Gruber and Monica Morrison, are meeting with a client, XTR Funds (XTR), to select an appropriate mean–variance-optimized (MVO) portfolio combination that meets various restrictions. Three possible portfolios meet XTR’s criteria; each portfolio’s expected performance is higher than XTR’s target return of 5.7% (Exhibit 1). Consequently, each prospective portfolio can be combined with a risk-free security to generate XTR’s target return.
EXHIBIT 1
MEAN–VARIANCE-OPTIMIZED (MVO) PORTFOLIOS
| MVO portfolio | Expected return (%) | Return standard deviation (%) | Portfolio weight in risk-free security (%)* |
|---|---|---|---|
| A | 9.5 | 18.69 | 49.35 |
| B | 8.2 | 14.95 | 39.06 |
| C | 7.8 | 14.18 | 35.00 |
Risk-free security expected return: 1.8% XTR target return: 5.7% | |||
* This is the proportional investment in the risk-free security that in combination with the associated MVO portfolio produces the target expected return of 5.7%.
