Investment Case

Our friend, John has recently inherited $50,000 and he is interested in investing it.

Because of my experience, he came to me first, but due to my heavy work load, I do not

have the time to give him any detailed advice. I thought since you are doing that

Investment paper, you should be able to apply some of your knowledge and help him

out. He wants to be able to invest by himself later on, so in addition to

recommendations on what to do with the money, he wants to know the basics about

investing and clear explanations on anything you have done.

Since it is a small portfolio and he has not got a lot of time, and with transaction costs it

is not worth him taking on too many stocks. I have suggested a two-stock portfolio

with the risk-free asset. So please just focus on one company from the S&P 500, and

pick two companies from the NASDAQ. Please choose one of the two NASDAQ stocks

(remember, explain your choice) to construct the optimal portfolio with the S&P 500

company you selected. Then use John’s answers (your own answers) to the utility

questionnaire to determine how he should allocate his money (forming the complete

portfolio using the right optimal risky portfolio and the risk-free asset). The annual risk

free rate is 1% and the sample period is from 1 July 2005 to 2 July 2012.

When you choose your S&P 500 company, choose one which pays dividends, as he