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Corr. -0.3162
Two-asset portfolios
Mean return
0.0200
0.0180
0.0160
0.0140
0.0120
0.0100
0.0080
0.0060
0.0040
0.0020
0.0000
0.0100 0.0150 0.0200 0.0250 0.0300 0.0350 0.0400 0.0450 0.0500 0.0
Standard deviation
0.0040
0.0020
0.0000
0.0100 0.0150 0.0200 0.0250 0.0300 0.0350 0.0400 0.0450 0.0500 0.0
Standard deviation
Column1 Column2
Column 1 Column 2
Column 1 1
Column 2 -0.316157794 1
0.25
0.2
0.15
0.1
0.05
0
0.1 0.15 0.2 0.25 0.3 0.35
Standard deviation
0.3 0.35
A. Inputs on three stocks: mean, standard deviation, and correlation matrix
Standard Expected
Stock Deviation Return
A 0.2 0.14
B 0.12 0.08
C 0.3 0.2
A B C
St. Dev 0.2 0.12 0.3
Mean 0.14 0.08 0.2
Correlation Matrix
A B C
A 1 0.5 0.2
B 0.5 1 0.4
C 0.2 0.4 1
B. Covariance Matrix
A B C
A 0.04 0.012 0.012
B 0.012 0.0144 0.0144
C 0.012 0.0144 0.09
C. Equally-Weighted Portfolio
A B C
Weights 0.3333 0.3333 0.3333
0.3333 0.004444 0.001333 0.001333
0.3333 0.001333 0.0016 0.0016
0.3333 0.001333 0.0016 0.01
1.0000 0.0071 0.0045 0.0129
Variance 0.0246
St. Dev 0.156773
R * weight 0.046667 0.026667 0.066667
Mean 0.14
Use Excel Solver (under Tools) to minimize portfolio variance, subject to:
1. Portfolio weights sum to 1 (a50=1);
2. A specified portfolio mean (b54=?);
3. Optional: portfolio weights>=0
Portfolio A B C
Weight -0.7819 2.4743 -0.6924
-0.781934 0.024457 -0.023217 0.006497
2.4743 -0.023217 0.088159 -0.024669
-0.692367 0.006497 -0.024669 0.043143
1.0000 0.0077 0.0403 0.0250
Variance 0.0730
St. Dev 0.27015
R * weight -0.109471 0.197944 -0.138473
Mean -0.05
Portfolio Weights
Mean St. Dev A B C
Mean
0.08 0.119512 0.048682 0.975659 -0.024341
0.1 0.12233 0.176471 0.745098 0.078431
0.12 0.135041 0.30426 0.514537 0.181204 0.15
0.14 0.155233 0.432049 0.283976 0.283976
0.16 0.180412 0.559838 0.053414 0.386748
0.1
0.18 0.208781 0.687627 -0.177147 0.48952
0.2 0.239208 0.815416 -0.407708 0.592292
0.22 0.271 0.943205 -0.638269 0.695064 0.05
0.25 0.320358 1.134895 -0.984122 0.849228
St. dev
Portfolio Optimization: Three Risky Assets
One plus
Expected Return
Inputs Expected Standard Exp Ret
Minimum Variance Frontier (3 risky
Return Deviation [1+E(r)] Ones
Riskless Rate (r) 0.04 0 1.04 1 0.25
Risky Asset 1 0.14 0.2 1.14 1
Risky Asset 2 0.08 0.12 1.08 1
0.2
Risky Asset 3 0.2 0.3 1.2 1
Correlations 0.15
1 2 3
1 1 0.5 0.2
2 0.5 1 0.4
0.1
3 0.2 0.4 1
0.05
Standard Deviations
1 2 3
0.2 0.12 0.3 0
-0.05 0.15
Variance and Covariance Matrix -0.05 Standard Devia
1 2 3
1 0.04 0.012 0.012
2 0.012 0.0144 0.0144
3 0.012 0.0144 0.09
Outputs
A 70.37037
B 76.33333
C 83.11048 Efficient Efficient
Delta 21.73721 Frontier Trade-off Individual
Gamma 0.317647 Curve Line Asset Optimal Combination
Standard Expected Expected Expected of Risky Assets
Index Deviation Return Return Return (Tangent Portfolio)
Risky Asset 1 0.2 0.14 1 0.705882
Risky Asset 2 0.12 0.08 2 -0.210084
Risky Asset 3 0.3 0.2 3 0.504202
Trade-off Curve 0 0.25 -0.037396
1 0.230922 -0.025183
2 0.212405 -0.01297
3 0.194608 -0.000756
4 0.177749 0.011457
5 0.16212 0.02367
6 0.148111 0.035884
7 0.136223 0.048097
8 0.127052 0.06031
9 0.121216 0.072524
100.119208 0.084737
110.121216 0.09695
120.127052 0.109163
130.136223 0.121377
140.148111 0.13359
15 0.16212 0.145803
160.177749 0.158017
170.194608 0.17023
180.212405 0.182443
190.230922 0.194657
20 0.25 0.20687
Optimal Comb. 0.213021 0.182857
Eff Trade-off Line 0 0 0.04
Eff Trade-off Line 1 0.213021 0.182857
Eff Trade-off Line 2 0.426043 0.325714
Portfolio Weights
riance Frontier (3 risky assets) & the CAL Portfolio Weights in Tangency Portf
0.8
0.6
0.4
0.2
0
1 2 3
-0.2
0.15 0.35
-0.4 Asset Number
Standard Deviation
ts in Tangency Portfolio
3 4 5
Asset Number
0.705882
-0.210084
0.504202
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