Alice and Bob are portfolio managers from two fund houses. They are both using modern portfolio...

Alice and Bob are portfolio managers from two fund houses. They are both using modern portfolio theory, specifically mean-variance optimisation, to construct their portfolios.

The following table shows the weightings of their portfolios:

Manager	risk-free asset	Stock A	Stock B	Stock C	Stock D	Stock E
Alice	10%	20%	25%	30%	5%	10%
Bob	15%	5%	20%	10%	30%	20%

Give three possible reasons why Alice and Bob result in different portfolios.

Expert Solution

The reasons why Alice and bob are resulting in different portfolio are as follows-

A. They are having a different approach towards allocation of the portfolio in risk free asset because they are trying to take different risk and bob is trying to allocate more towards risk free securities because he is more conservative in nature.

B. Most Concentrated stock in the portfolio- most concentrated stock in the portfolio of Alice is stock C , whereas most concentrated stock in portfolio of bob is stock D, so there has been a different focus on maximization of their return through largest allocation of different asset in their portfolio because they are believing that different assets are going to provide them with higher rate of return.

C. Least concentrated stock in portfolio- Least concentrated stock in portfolio of Alice is stock D, whereas stock A is least concentrated stock in portfolio of Bob, because they both believe that these stocks are having different type of risk associated with their operations and they can in fact impact the overall return of the portfolio so the portfolio stock which have the least concentration will be least reliable according to the fund manager as per the current scenario.

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