ef

Asset A
Asset B

Table of correlations
Asset A
Asset B
1.0000
0.3694
0.3694
1.0000

Asset A
Asset B

Table of expected returns and risk

E(return)
Risk
20.00%
28.00%
18.00%
33.00%

Asset A
Asset B

Table of covariances
Asset A
Asset B
7.84%
3.41%
3.41%
10.89%

Things
Things
Things
Things

in
in
in
in

dark grey are input paramete

light grey are computed inter
yellow are labels
red are "Solver" inputs or out

Proporition of wealth invested in

Asset A
150.80%
Asset B
-111.15%
Total

0.396570234 (this is a CONSTRAINT for "Solver", this cell B23 must be forced to equal one)
(it is the constraint that the total proportions of our wealth must equal one)
This bit is used to find the risk of the portfolio
Asset A
Asset B
Proportion
150.80%
-111.15%
These numbers are a table of, for insta
Asset A
150.80%
17.8294%
-5.7210%
proportion of A * proportion of B *
Asset B
-111.15%
-5.7210%
13.4529%
covariance of A and B

Expected return on the portfolio of all 3 assets

10.15% (it you are minimizing risk for a given return you should tell "Solver" that
this cell, B35, is fixed--at whatever level of return you want. If you are maximizing
return for a fixed risk, you should tell "Solver" to maximize this cell
Risk associated with the portfolio of all 3 assets
44.54% (if you are minimizing risk for a given return you should tell "Solver" to minimize
this cell, B40. If you are maximizing return for a fixed risk you should
tell "Solver" that this cell is fixed.)

Now use "solver" to either minimize the risk for a given return
(ie minimize B37 for a prescribed value of B35) or
maximize return for a given risk (ie, maximize B35 for a given
value of B37).
In both cases B23 should be constrained to equal 1, this is the

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ef

condition that our "total wealth" is invested in the assets.

Page 2

ngs
ngs
ngs
ngs

ef

in
in
in
in

dark grey are input parameters

light grey are computed intermediate things
yellow are labels
red are "Solver" inputs or outputs

3 must be forced to equal one)

f our wealth must equal one)

ese numbers are a table of, for instance

portion of A * proportion of B *
variance of A and B

ou should tell "Solver" that

urn you want. If you are maximizing
to maximize this cell

ou should tell "Solver" to minimize

a fixed risk you should

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ef

Page 4

Asset A
Asset B

Table of correlations
Asset A
Asset B
100.00%
36.94%
36.94%
100.00%

Asset A
Asset B
Asset C

Table of expected returns and risk on the risky assets

E(return)
Risk
20.00%
28.00%
18.00%
33.00%
33.00%
40.00%

Riskfree rate

Asset A
Asset B
Asset C

1.00%

Things
Things
Things
Things

in
in
in
in

dark grey are input paramete

light grey are computed inter
yellow are labels
red are "Solver" inputs or out

The return on the risk free asset

Table of covariances for the risky assets

Asset A
Asset B
Asset C
7.8400%
3.4133%
0.0000%
3.4133%
10.8900%
0.0000%
0.0000%
0.0000%
0.0000%

Construct covariance matrix using form

such as covar(A,B)=risk(A)*risk(B)*corr

Proporition of wealth invested in purely risky assets

Asset A
0.4261
Normally these values are set by "Solver" but it may be necessary to
Asset B
0.0953
reset them to "sensible" values and then re-run "Solver" if "Solver"
Asset C
0.4785
fails to find a solution (eg, B23=1/3, B24=1/3, B25=1/3 )
Total
1.0000 (this is a CONSTRAINT for "Solver", this cell B23 must be forced to equal one)
(it is the constraint that the sum of the proportions of our wealth must equal one)
This bit is used to find the risk of the portfolio of purely risky assets
Asset A
Asset B
Asset C
Proportion
42.61%
9.53%
47.85% These numbers are a table of, for insta
Asset A
42.61%
1.4237%
0.1386%
0.0000% proportion of A * proportion of B *
Asset B
9.53%
0.1386%
0.0989%
0.0000% covariance of A and B
Asset C
47.85%
0.0000%
0.0000%
0.0000%

Expected return on the portfolio of all 3 risky assets

26.03%
Risk associated with the portfolio of all 3 risky assets
13.42%
Market Price of Risk ( = Slope of the Capital Market Line)
1.86568895
To find the Market Price of Risk (and hence the Capital Market Line)
use "solver" to maximize cell B44 subject to the constraint that
cell B26 is equal to one.
You access "solver" from the "Tools" menu.

ngs
ngs
ngs
ngs

in
in
in
in

dark grey are input parameters

light grey are computed intermediate things
yellow are labels
red are "Solver" inputs or outputs

nstruct covariance matrix using formulae

h as covar(A,B)=risk(A)*risk(B)*correl(A,B)

y "Solver" but it may be necessary to

and then re-run "Solver" if "Solver"
1/3, B24=1/3, B25=1/3 )
3 must be forced to equal one)
ions of our wealth must equal one)

ese numbers are a table of, for instance

portion of A * proportion of B *
variance of A and B

results

Building an efficient frontier using Excel and solver is an inefficient process.

You have to either maximize the return given a level of risk (this is best for large risks and returns)
or minimize the risk for a given level of return (this is best for small risks and returns)
for a lot of possible levels of risk and return. Each specific level of risk or return requires
a separate solver run. This takes a great deal of time.
Below are the results for a three asset model where the expected returns and variance of returns are
E(return)
Risk
Asset A
20.00%
28.00%
Asset B
18.00%
33.00%
Asset C
33.00%
40.00%
the covariance matrix is
Asset A
Asset B
market price of risk
Asset A
7.84%
3.41%
risk free rate
Asset B
3.41%
10.89%
and the correlation matrix is
Asset A
Asset A
100.00%
Asset B
36.94%

efficient frontier
risk
return
70.76%
0.00%
65.14%
2.00%
59.59%
4.00%
54.13%
6.00%
48.80%
8.00%
43.62%
10.00%
41.11%
11.00%
38.67%
12.00%
36.31%
13.00%
34.05%
14.00%
31.91%
15.00%
29.92%
16.00%
28.10%
17.00%
26.49%
18.00%
25.13%
19.00%
24.07%
20.00%
23.35%
21.00%
22.99%
22.00%
23.00%
22.90%
24.00%
24.77%
25.00%
25.75%
26.00%
26.52%
27.00%
27.19%
28.00%
27.80%
29.00%
28.37%
30.00%
28.90%

Asset B
36.94%
100.00%

% of asset A
100.59%
96.14%
91.68%
87.23%
82.77%
78.32%
76.09%
73.86%
71.64%
69.41%
67.18%
64.95%
62.73%
60.50%
58.27%
56.04%
53.82%
51.59%
49.60%
45.38%
43.23%
41.58%
40.11%
38.70%
37.53%
36.28%

Page 7

% of asset B
132.82%
123.35%
113.88%
104.40%
94.93%
85.46%
80.72%
75.99%
71.25%
66.51%
61.78%
57.04%
52.30%
47.57%
42.83%
38.10%
33.36%
28.62%
24.33%
15.51%
10.90%
7.17%
3.97%
1.12%
-1.63%
-4.11%

results

40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
100.00%
110.00%
120.00%
130.00%
140.00%
150.00%

33.40%
37.31%
41.00%
44.59%
48.11%
51.59%
55.04%
58.48%
61.90%
65.31%
68.71%
72.10%

26.16%
17.43%
9.25%
1.28%
-6.46%
-14.22%
-21.74%
-29.41%
-36.96%
-44.60%
-52.13%
-59.77%
minimized risk for a given return
maximized return for a given risk

Page 8

-25.37%
-43.86%
-61.38%
-78.36%
-95.12%
-111.60%
-128.10%
-144.36%
-160.61%
-176.72%
-192.86%
-208.87%

results

large risks and returns)

turn requires

nd variance of returns are

market price of risk

risk free rate

short selling

no short selling

1.86568895
1.00%

capital market line

risk
return
0.00%
1.00%
4.00%
8.46%
8.00%
15.93%
12.00%
23.39%
16.00%
30.85%
20.00%
38.31%
24.00%
45.78%
28.00%
53.24%
32.00%
60.70%
36.00%
68.16%
40.00%
75.63%
44.00%
83.09%
48.00%
90.55%
52.00%
98.02%
56.00%
105.48%
60.00%
112.94%
64.00%
120.40%
68.00%
127.87%
72.00%
135.33%
76.00%
142.79%
80.00%
150.26%
84.00%
157.72%
88.00%
165.18%
92.00%
172.64%
96.00%
180.11%
100.00%
187.57%

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results

short selling

104.00%
108.00%
112.00%
116.00%
120.00%
124.00%
128.00%
132.00%
136.00%
140.00%
144.00%
148.00%

195.03%
202.49%
209.96%
217.42%
224.88%
232.35%
239.81%
247.27%
254.73%
262.20%
269.66%
277.12%

Page 10

graphs

op set border

efficient frontier

50%

75%

assets

80%

60%

return

40%

20%

0%
0%

25%

100%

risk

op set border
80%

60%

return

40%

20%

Page 11

efficient frontier

cap market line

assets

return

40%

graphs

20%

0%
0%

25%

50%

75%

risk

Page 12

100%

graphs

cient frontier

assets

100%

125%

150%

cap market line

assets

Page 13

graphs

100%

125%

150%

Page 14