... of tangency with the portfolio set. This tangency portfolio is the optimal risk portfolio. (Check appendix for efficient frontier) * Optimal Asset Allocation: STD ER S (Reward-to-Variability) 12.67% 11.00% 0.2368 Weights Stocks 50.89% T Bonds 0.00% S.T. Sec 0.59% C.Bonds 48.52% * The optimal risk portfolio has an expected return of 11%. However the minimum downside that is acceptable is a loss of 5%. With this portfolio mix, the probability that the investment will lose excess of 5% is 10.33% [=NORMSDIST{(-5 - 11.0)/12.67}]. We now present Option2 to minimize this downside. Option2: Optimal Portfolio based on a predetermined return goal * Predetermined investment goal is that the loss should not be greater than 5% * Calculating the probability of a 5% loss on investment for different portfolio mixes yields the following results: STD ER Z (for X = -5%) Pr 2.00% 7.00% -6.000 0.00% 1.93% 7.10% -6.269 0.00% 4.84% 8.50% -2.789 0.26% 6.36% 9.00% -2.201 1.39% 7.29% 9.30% -1.962 2.49% 7.60% 9.40% -1.895 2.91% 9.49% 10.00% ...

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