These question begins with a "memo from your boss" identifying a real-world business problem. You will respond to this memo, both by preparing a spreadsheet solving the issue, as well as writing a memo which explains your solution in English terms.
Linear Equations
To: You
From: Your boss
Date: September 1, 20xx
Subject: Building an investment portfolio
Our company has about $1 million in excess cash that we want to invest for the next five years in preparation for building a new headquarters at that future time. We want to earn a good return on this investment, but we are concerned about the level of risk we would be undertaking. The board of directors decided that we would divide this investment into four equal parts, with four different investment strategies in order to diversify our risk:
1. The first part should be invested as safely as possible, with virtually no risk of losing our money.
2. One part should be invested at the risk level of the average of the biggest companies in the United States, the Standard & Poors 500 (S&P 500).
3. One part should be invested at half of the risk level of the S&P 500, in order to protect ourselves if the next five years are not a good business climate.
4. The last part should be invested at twice the risk level of the S&P 500 in order to capture better returns if we have a boom market over the next five years.
Can you give me an estimate of the average annual return percentage we could expect from this investment? Explain to me as clearly and concisely as possible how you obtained this result, and attach your spreadsheet calculations. I would recommend that you use the CAPM model to estimate this.
Remember to do both things: use the attached spreadsheet to solve the issue, as well as writing a memo which explains your solution in English terms.