Prob

0.167
0.167
0.167
0.167
0.167
0.167

Y
-5
-4
-2
2
4
5
0.000

25
16
4
4
16
25
15.000 <=Expected Return

X-E(X)
-5.00
-4.00
-2.00
2.00
4.00
5.00
0.00

Y-E(Y)
10.00
1.00
-11.00
-11.00
1.00
10.00
0.00

Correlation coefficient = Covariance/(Standard deviation of X * Standard deviation of Y)

Standard deviation of X
Standard deviation of Y
Covariance of XY

4.24264
9.42338
0.00000

Correlation coefficient

0.00000

No, this does not mean that X and Y are independent random variables (there is a non-linear relatio
Correlation coefficient measures the linear relationship between X and Y and there is no such linear

(X-E(X))(Y-E(Y))
-50.00
-4.00
22.00
-22.00
4.00
50.00
0.00

(X-E(X))^2 (Y-E(Y))^2
25.00
100.00
16.00
1.00
4.00
121.00
4.00
121.00
16.00
1.00
25.00
100.00
90.00
444.00

Standard deviation of Y)

ariables (there is a non-linear relationship between X and Y).

X and Y and there is no such linear relationship.

Variance-Covariance matrix
0.30
0.02
-0.05
0.02
0.40
0.06
-0.05
0.06
0.60
First portfolio
0.3

0.2

Mean returns
10%
12%
14%

Transposing the first port

0.3
0.2
0.5

0.5

Mean return for the first portfolio

12.40%

Variance of the first portfolio

19.24%

Second portfolio
0.5
0.4

Transposing the second p

0.5
0.4
0.1

0.1

Mean return for the first portfolio

11.20%

Variance of the first portfolio

15.28%

Covariance of the portfolio's returns

Correlation of the portfolio's retruns

0.3 <<< this is the proportion in portfolio 1

0.11560
0.13864
12.60%

0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0

std dev
mean
37.23%
0.1156
39.09%
11.20%
38.16%
11.32%
37.53%
11.44%
37.23%
11.56%
37.27%
11.68%
37.63%
11.80%
38.31%
11.92%
39.30%
12.04%
40.58%
12.16%
42.10%
12.28%
43.86%
12.40%

12.40%
12.20%
12.00%
M ean Return

Proportion
Mean
Variance

0.1106
0.6450

11.80%
11.60%
11.40%
11.20%
11.00%
10.80%

10.60%
36.00% 37.00% 38

11.00%
10.80%

10.60%
36.00% 37.00% 38

Transposing the first portfolio

Transposing the second portfolio

Mean-Variance Frontier
12.60%
12.40%
12.20%
M ean Return

12.00%
11.80%
11.60%
11.40%
11.20%
11.00%
10.80%
10.60%
36.00% 37.00% 38.00% 39.00% 40.00% 41.00% 42.00% 43.00% 44.00% 45.00%
Standard Deviation

11.00%
10.80%
10.60%
36.00% 37.00% 38.00% 39.00% 40.00% 41.00% 42.00% 43.00% 44.00% 45.00%
Standard Deviation

Company A stock Company B stock

23%
37%
0.1000
0.2000
31.62%
44.72%

Average return
Variance
Standard deviation
Covariance of returns
Correlation of returns

0.00350
0.02475

Portfolio
Proportion of A
Proportion of B
Portfolio average return
Portfolio variance
Portfolio standard deviation

0.5
0.5
30.00%
7.68%
27.70%

Portfolio data table

Proportion of A

Standard deviation
0.0
44.72%
0.1
40.45%
0.2
36.49%
0.3
32.93%
0.4
29.95%
0.5
27.70%
0.6
26.40%
0.7
26.17%
0.8
27.04%
0.9
28.92%
1.0
31.62%

Mean
37.00%
35.60%
34.20%
32.80%
31.40%
30.00%
28.60%
27.20%
25.80%
24.40%
23.00%

Answer
Answer: As you can see from the graph, the portfolio is on the "downside" of the parabola.
By playing with the proportion of A, you can find a portfolio which has the same standard deviation
as the red dot, but has higher mean return (indicated by the arrow). By looking at the table in A18:C28,
you can see that the proportion of A in this portfolio is between 0.5 and 0.6.
Here's the better portfolio:
Proportion of A
0.541

27.04%

29.43%

You can use Solver to find the proportion of A. Set the standard deviation to 27.04% (by changing the proportion of A) and

Finding the minimum variance portfolio: using Solver to minimise the variance in cell B13 with respect to the proportion in A
Portfolio
Proportion of A
Proportion of B
Portfolio average return
Portfolio variance
Portfolio standard deviation

0.6706484642
0.3293515358
27.61%
6.82%
26.12%

Finding the portfolio with a yield of 25%: using Solver to set the average return to 25% with respect to the proportion in A.
Portfolio
Proportion of A
Proportion of B
Portfolio average return
Portfolio variance
Portfolio standard deviation

Average return
Variance
Standard deviation

0.85715
0.14285
25.00%
7.84%
28.00%

Company A stock Company B stock Risk-free rate

23%
37%
8%
0.1000
0.2000
31.62%
44.72%

Covariance of returns
Correlation of returns

0.00350
0.02475

Portfolio
Proportion of A
Proportion of B
Portfolio average return
Portfolio variance
Portfolio standard deviation

0.5
0.5
30.00%
7.68%
27.70%

Risk Premium

22.00%

Sharpe ratio

79.41%

Using Solver to maximise Sharpe ratio with respect to the proportion in A:

New proportion in A
New proportion in B
The Market Portfolio (M):
Expected Return
Standard Deviation

0.5044378696
0.4955621304

29.94%
27.62%

Frontier--the particular portfolio is marked in red

40.00%

Mean

35.00%
30.00%
25.00%
20.00%
20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

Standard deviation

ging the proportion of A) and subject to the constraint that average return is bigger than 25.80%.

respect to the proportion in A.

50.00%

spect to the proportion in A.

50.00%