Portfolio Frontier

12.00%

10.00%

8.00%
Nordstrom

ER

Efficient frontier of risky assets

6.00%

Microsoft
Starbucks
global min

Tangency

tangency
tangency + T-bills
frontier

Microsoft
4.00%

Efficient frontier of TBills and risky assets

Starbucks
Global min

2.00%

0.00%
0.00%

Nordstrom

5.00%

10.00%

15.00%
SD

20.00%

25.00%

asset
muvec
microsoft
4.27%
nordstrom
0.15%
starbucks
2.85%

sigma
microsoft
nordstrom
starbucks

microsoft nordstrom starbucks

0.010
0.002
0.001
0.002
0.011
0.003
0.001
0.003
0.020

Compte global minimum variance portfolio using matrix algebra and solver
asset
share
mvec
constraint var(Rp,m)
microsoft m_msft
44%
1
0.0053
nordstrom m_nord
36%
starbucks m_star
19%
p2 ,m mm
E[Rp.m]
2.50%
p ,m m
SD(Rp,m)
7.27%
0.024984
100%
80%

weight

60%

50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%

40%
20%
0%
-20%

microsoft

nordstrom

starbucks

assets

Compute tangency portfolio using solver and matrix algebra

asset
share
tvec
constraint E[Rp,t]-rf
Var(Rp,t) slope
microsoft t_msft
103%
1
4.685%
0.0124
0.421
nordstrom t_nord
-32%
starbucks t_star
30%
t rf
E[Rp,t]
5.185%
1/ 2
SD(Rp,t)
11%

t t

Weights in Tangency Portfolio

120%
100%
80%
weights

weights

Weights in Global Minimum Variance Portfolio

60%
40%
20%

weights

20%
0%
-20%
-40%
microsoft

nordstrom
asset

starbucks

rf
0.005

asset
microsoft
nordstrom
starbucks

compute efficient portfolio with expected return = Microsoft average return

share
yvec constraint target return E[Rp,y]
var(Rp,y) SD(Rp,y)
y_msft
83%
1
4.27%
4.27% 0.0084
9%
y_nord
-9%
y_star
26%

Weights in Efficient Portfolio

z m (1 ) y

100%
80%
60%

alpha

40%
20%
0%
-20%
microsoft

nordstrom
asset

Tangency + T-bills
xt
E[Rp]
SD(Rp)
0 0.50%
0.00%
0.1 0.97%
1.11%
0.2 1.44%
2.23%
0.3 1.91%
3.34%
0.4 2.37%
4.45%
0.5 2.84%
5.56%
0.6 3.31%
6.68%
0.7 3.78%
7.79%
0.8 4.25%
8.90%
0.9 4.72%
10.02%
1 5.19%
11.13%

starbucks

1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
-0.1
-0.2
-0.3
-0.4
-0.5
-0.6
-0.7
-0.8
-0.9
-1
-1.1
-1.2
-1.3
-1.4

1-alpha E[Rp,z]
0 2.50%
0.1 2.68%
0.2 2.85%
0.3 3.03%
0.4 3.21%
0.5 3.38%
0.6 3.56%
0.7 3.74%
0.8 3.92%
0.9 4.09%
1 4.27%
1.1 4.45%
1.2 4.63%
1.3 4.80%
1.4 4.98%
1.5 5.16%
1.6 5.33%
1.7 5.51%
1.8 5.69%
1.9 5.87%
2 6.04%
2.1 6.22%
2.2 6.40%
2.3 6.58%
2.4 6.75%

1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2

5.65%
6.12%
6.59%
7.06%
7.53%
8.00%
8.47%
8.93%
9.40%
9.87%

12.24%
13.35%
14.47%
15.58%
16.69%
17.80%
18.92%
20.03%
21.14%
22.26%

-1.5
-1.6
-1.7
-1.8
-1.9
-2

2.5
2.6
2.7
2.8
2.9
3

6.93%
7.11%
7.28%
7.46%
7.64%
7.82%

rage return
SD(Rp,y)

cov(Rp,m,Rp,y)
0.00528

m, y my

m (1 ) y
var(Rp,z) SD(Rp,z)
0.00528
7.27%
0.00531
7.29%
0.00541
7.35%
0.00556
7.46%
0.00578
7.60%
0.00605
7.78%
0.0064
8.00%
0.0068
8.24%
0.00726
8.52%
0.00779
8.82%
0.00837
9.15%
0.00902
9.50%
0.00973
9.87%
0.01051 10.25%
0.01134 10.65%
0.01224 11.06%
0.0132 11.49%
0.01422 11.92%
0.0153 12.37%
0.01644 12.82%
0.01765 13.28%
0.01891 13.75%
0.02024 14.23%
0.02163 14.71%
0.02309 15.19%

Frontier Portfolios
microsoft nordstrom starbucks
44%
48%
52%
56%
60%
64%
67%
71%
75%
79%
83%
87%
91%
94%
98%
102%
106%
110%
114%
118%
121%
125%
129%
133%
137%

36%
32%
27%
23%
18%
14%
9%
5%
0%
-5%
-9%
-14%
-18%
-23%
-27%
-32%
-36%
-41%
-45%
-50%
-54%
-59%
-64%
-68%
-73%

19%
20%
21%
21%
22%
23%
23%
24%
25%
26%
26%
27%
28%
28%
29%
30%
30%
31%
32%
32%
33%
34%
34%
35%
36%

0.0246
0.02618
0.02782
0.02952
0.03128
0.0331

15.69%
16.18%
16.68%
17.18%
17.69%
18.19%

141%
145%
149%
152%
156%
160%

-77%
-82%
-86%
-91%
-95%
-100%

36%
37%
38%
38%
39%
40%

Efficient portfolio with E[Rp]= microsoft and no short sales

constraint target return E[Rp,w] var(Rp,w)
microsoft wa
100%
1
4.27% 4.27%
0.0100
nordstrom wb
0%
starbucks wc
0%

weights

Weights in efficient portfolio with same

E[R] as Microsoft
120%
100%
80%
60%
40%
20%
0%
microsoft

nordstrom
assets

starbucks

SD(Rp,w)
10%

Mar-95
Apr-95
May-95
Jun-95
Jul-95
Aug-95
Sep-95
Oct-95
Nov-95
Dec-95
Jan-96
Feb-96
Mar-96
Apr-96
May-96
Jun-96
Jul-96
Aug-96
Sep-96
Oct-96
Nov-96
Dec-96
Jan-97
Feb-97
Mar-97
Apr-97
May-97
Jun-97
Jul-97
Aug-97
Sep-97
Oct-97
Nov-97
Dec-97
Jan-98
Feb-98
Mar-98
Apr-98
May-98
Jun-98
Jul-98
Aug-98
Sep-98

Nordstrom Starbucks Microsoft

-3.62%
0.52% 12.13%
-5.68%
-2.11% 13.92%
7.82%
21.24%
3.53%
-0.30%
20.36%
6.50%
-2.76%
4.80%
0.14%
2.77%
6.79%
2.19%
1.20%
-5.46%
-2.19%
-11.91%
3.57%
9.98%
6.04%
7.37% -13.78%
3.14%
-0.59%
0.72%
-3.14% -22.61%
5.27%
14.24%
5.09%
6.47%
7.08%
27.97%
4.40%
4.91%
15.15%
9.37%
0.49%
0.00%
4.74%
-13.63%
4.06%
1.15%
-6.98%
-8.30%
-1.89%
-5.89%
23.08%
3.85%
-2.60%
0.76%
7.37%
-5.23%
-1.53%
3.99%
19.04%
6.33% 13.36%
-20.50% -19.03%
5.20%
4.65%
17.94% 21.07%
-0.67%
-1.84%
-4.51%
3.01% -12.67%
-6.15%
3.57%
0.84% 28.15%
20.39%
5.30%
2.04%
2.19%
21.20%
1.90%
14.45%
5.01% 11.22%
3.39%
0.15%
-6.72%
8.59%
1.96%
0.09%
-4.00% -23.67%
-1.76%
-3.50%
5.53%
8.48%
2.30%
9.56%
-9.06%
-17.12%
-4.84% 14.35%
12.21%
7.89% 12.76%
10.69%
13.57%
5.45%
2.51%
6.02%
0.70%
9.84%
-0.26%
-6.08%
6.95%
10.73% 24.52%
-21.29% -24.38%
1.43%
-3.96% -28.27% -13.62%
-19.03%
13.67% 13.73%

CER Model Estimates

Average
Standard Deviation
Variance
Covraiance matrix

Correlation matrix

xvec

0.5
0.25
0.25

Oct-98
Nov-98
Dec-98
Jan-99
Feb-99
Mar-99
Apr-99
May-99
Jun-99
Jul-99
Aug-99
Sep-99
Oct-99
Nov-99
Dec-99
Jan-00

9.85%
31.25%
-7.13%
18.23%
-3.17%
1.54%
-14.98%
1.13%
-5.80%
-6.35%
-10.22%
-4.75%
-7.95%
11.22%
-5.54%
-17.90%

18.12%
6.15%
19.62%
-7.51%
1.55%
5.97%
27.48%
-0.17%
1.85%
-47.97%
-1.63%
8.00%
9.27%
-2.33%
-9.11%
27.73%

-3.88%
14.18%
12.82%
23.26%
-15.33%
17.73%
-9.73%
-0.77%
11.13%
-4.97%
7.57%
-2.18%
2.18%
-1.65%
24.87%
-17.63%

Univariate Statistics
rmsft
rnord
rsbux
4.27%
0.15%
2.85%
10.06%
10.55%
14.22%
0.01
0.01
0.02

Nordstrom
Starbucks
Microsoft

Nordstrom
0.011
0.003
0.002

Starbucks
0.003
0.020
0.001

Microsoft
0.002
0.001
0.010

Nordstrom

Nordstrom
1.000

Starbucks
0.176

Microsoft
0.174

Starbucks

0.176

1.000

0.079

Microsoft

0.174

0.079

1.000

A
1
3

2
4

5
7

6
8

1
2

3
4

2
6

4
8

19
43

22
50

1
0

0
1.00

1
3

2
4

2*matA

A+B

A*B
6
10

8
12

-4
-4

-4
-4

A-B

I2

Ainv
-2
1.5

1
-0.5

1
0

1E-16
1

1
2
3
4

one_vec
1
1
1
1

test

x_vec

x'1
10

10