Quan Tech Partners OuanTech Partners is an investment management firm headquartered in Denver with regional offices in Salt Lake,

Albuquerque and Phoenix. QuanTechs primary activity is to provide portfolio management services to individuals with a net worth of $15 million or more. The firm also performs related custodial and performance monitoring services. Annual fees run from 1 to 2% of the market value of a portfolio depending upon services rendered. Since its founding in 1985, the firm has enjoyed amazing growth. Starting with just $15 million, it now oversees assets well in excess of $ 550 million. The firms staff consists of a small group of financial analysts, information systems personnel, and regional portfolio managers. The small labour force is augmented by a state of the art computer system and the application of the discipline of sophisticated model building and quantitative techniques. The root of the construction and selection of optimum portfolio is the basic model developed by Nobel Laureate, Dr. William Sharpe. Jason Cate, A Ft. Collins businessman, rose rapidly to success and fortune by developing and marketing a highly successful line of computer software for children games. Cate is an extraordinary software designer and a brilliant entrepreneur. He visited the Denver office of QuanTech Partners in October 1995 to discuss the placement of $6 million in the hands of the firm for investment purposes. Cate had successful apartment holdings throughout Colorado, and New Mexico in addition to the equity in his software business. He has recently liquidated his stock investments in an account with Dewey and Reiss, a Dallas brokerage firm. The portfolio has performed poorly, providing him an annual rate of return of 7.3% over the past three years. Cate had heard of the success QuanTech has enjoyed for its clients using sophisticated mathematical models and had decided that his investments could certainly perform no worse than they had in the hands of Denwey and Reiss. He asked Quantech for a simple demonstration of how they created portfolios for clients. The regional portfolio manager, Janet Merck, prepared a list of stocks with the essential ingredients used by the firm in the selection of efficient combinations of candidate stocks. She felt that these stocks would provide a useful base of demonstrating the process to Cate. Question: Construct optimum portfolio Exhibit 1 List of Candidate Stocks Beta 1.11 1.2 1.08 1.05 1.1 0.9 1.12 1.15 1.1 1.00 0.9 0.95

Security Merck Reebok Tooisie Roll Walt Disney Ryan homes Kellogg Boise Cascade Coors Wal mart PepsiCo Bank of America Microsoft

Alpha 0.2 0.00 0.6 0.6 0.3 1.3 -0.1 -0.3 -0.2 0.3 0.8 0.4

Unsystematic Risk 8.9 10.70 9.81 5.25 12.65 4.32 6.23 7.00 5.33 4.24 6.00 9.7

American Brands Houston Gas IBM Rochester Telephone El Paso Electric Amway Risk Free rate Market Return Market standard deviation

0.55 1.2 -0.2 0.4 0.3 1.00 6% 12.00% 25

0.8 0.7 0.85 0.75 0.75 0.6

4.08 10.55 7.55 4.5 6.26 8.9