CASE

QuanTech 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 individual 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 percent 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 labor 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 Laureat Dr. William Sharpe.
Jason Cate, a Ft. Collins businessmen, rose rapidly to success and fortune by
developing and marketing a highly successful line of computer software for childrens
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 had recently liquidated his stock investments in an account with Dewey and
Reiss, a Dallas brokerage firm. The portfolio had performed poorly, providing him with
an annual rate of return of 7.3 percent over the past three years.
Cate had heard of the success QuanTech had 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 Dewey 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. (See
Exhibit 1). She felt that these stocks would provide a useful base for demonstrating the
process to Cate.(Source: Donald E Fischer , Ronald J Jordan, Pp. 641)

Question
Construct an Optimum Portfolio
EXHIBIT 1
Security
Merck
Reebok
Tootsie Roll
Walt Disney
Ryan Homes
Kellogg
Boise Cascade
Coors
Wall Mart
PepsiCo
Bank of America
Microsoft
American Brands
Houston Gas
IBM
Rochester Telephone
El Paso Electric
Amway
Risk-free rate
Market return
Market variance

Alpha
0.20
0.00
0.60
0.60
0.30
1.30
-1.10
-0.30
-0.20
0.30
0.80
0.40
0.55
1.20
-0.20
0.40
0.30
1.00
6.00
12.00
25

Beta
1.11
1.20
1.08
1.05
1.10
0.90
1.12
1.15
1.10
1.00
0.90
0.95
0.80
0.70
0.85
0.75
0.75
0.60

Unsystematic risk
8.90
10.70
9.81
5.25
12.65
4.32
6.23
7.00
5.33
4.24
6.00
9.70
4.08
10.55
7.55
4.55
6.26
8.9