Portfolio analysis

Month

Small
Cap
1
2
3
4
5
6
7
8
9
10
11
12

Mean
St. Dev.
Corr.

LT Treasuries
w1

0.1126
0.0452
-0.0249
-0.0403
-0.0014
-0.0519
0.0370
-0.0228
0.0131
0.0259
0.0885
0.0441

-0.0324
0.0051
-0.0094
0.0016
0.0243
0.0200
0.0398
0.0067
0.0185
0.0198
0.0010
0.0246

0.0188
0.0504

0.0100
0.0189

1-w1
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0

St. Dev
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0

0.0504
0.0448
0.0393
0.0339
0.0288
0.0240
0.0198
0.0167
0.0153
0.0162
0.0189

Mean
0.0188
0.0179
0.0170
0.0161
0.0152
0.0144
0.0135
0.0126
0.0117
0.0108
0.0100

-0.3162

Mean return

Two-asset portfolios
0.020
0.018
0.016
0.014
0.012
0.010
0.008
0.006
0.004
0.002
0.000
0.00

0.01

0.02

0.03

0.04

Standard deviation

Standard deviation

Column1
Mean
Standard Error
Median
Mode
Standard Deviation
Sample Variance
Kurtosis
Skewness
Range
Minimum
Maximum
Sum
Count

Column 1
Column 2

0.05

Column2
0.018758333
0.014550666
0.0195
#N/A
0.050404986
0.002540663
-0.46690967
0.412884278
0.1645
-0.0519
0.1126
0.2251
12

Mean
Standard Error
Median
Mode
Standard Deviation
Sample Variance
Kurtosis
Skewness
Range
Minimum
Maximum
Sum
Count

Column 1

Column 2

1
-0.31615779

0.06

0.00996667
0.00545959
0.0126
#N/A
0.01891259
0.00035769
1.23749115
-0.7991079
0.0722
-0.0324
0.0398
0.1196
12

Three-asset portfolios with known expected return and variance-covariance matrix:

Mean, St. Dev

Return
St. dev

Correlation Coefficients

Stock 1 Stock 2 Stock 3

0.14
0.08
0.2
0.2
0.12
0.3

Stock 1
Stocks
2 and 3

Stocks
1 and 3

Stocks
1 and 2

Mixed
weights

0
0
0
0
0
0
0
0.2
0.4
0.6
0.8
1
0
0.2
0.4
0.6
0.8
1
0.2
0.2
0.2
0.4
0.4
0.6

Portfolio weight
Stock 2 Stock 3
0
1
0.2
0.8
0.4
0.6
0.6
0.4
0.8
0.2
1
0
0
1
0
0.8
0
0.6
0
0.4
0
0.2
0
0
1
0
0.8
0
0.6
0
0.4
0
0.2
0
0
0
0.2
0.6
0.4
0.4
0.6
0.2
0.2
0.4
0.4
0.2
0.2
0.2

Stock 1
Stock 1
Stock 2
Stock 3
Portfolio Portfolio
St. Dev Return
0.3
0.2
0.25057
0.176
0.204
0.152
0.16278
0.128
0.132
0.104
0.12
0.08
0.3
0.2
0.25108
0.188
0.21109
0.176
0.1859
0.164
0.18177
0.152
0.2
0.14
0.12
0.08
0.12106
0.092
0.1317
0.104
0.14988
0.116
0.17325
0.128
0.2
0.14
0.20463
0.164
0.16356
0.14
0.13297
0.116
0.17158
0.152
0.14272
0.128
0.15965
0.14

Stock 2 Stock 3
1
0.5
0.2
1
0.4
1

Three-Asset Portfolio
0.25

Expected return

0.2

0.15

0.1

0.05

0.05

0.1

0.15

0.2

Standard deviation

0.25

0.3

0.35

A. Inputs on three stocks: mean, standard deviation, and correlation matrix

Stock
A
B
C

Standard Expected
Deviation Return
0.2
0.14
0.12
0.08
0.3
0.2
A

St. Dev
Mean

A
B
C

0.2
0.14

C
0.12
0.08

Correlation Matrix
A
B
1
0.5
0.5
1
0.2
0.4

0.3
0.2

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

Weights
0.3333
0.3333
0.3333
1.0000
Variance
St. Dev
R * weight
Mean

A
B
C
0.3333
0.3333
0.3333
0.004444 0.001333 0.001333
0.001333
0.0016
0.0016
0.001333
0.0016
0.01
0.0071
0.0045
0.0129
0.0246
0.156773
0.046667 0.026667 0.066667
0.14

D. Minimize Portfolio Variance, Given Portfolio Mean

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
-0.78193 0.024457 -0.02322 0.006497
2.4743 -0.02322 0.088159 -0.02467
-0.69237 0.006497 -0.02467 0.043143
1.0000
0.0077
0.0403
0.0250
Variance
0.0730

St. Dev
0.27015
R * weight -0.10947 0.197944
Mean
-0.05

-0.13847

E. Unrestricted Efficient Frontier

St. Dev

-0.05
-0.02
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
0.22
0.25

0.27015
0.222987
0.193534
0.166665
0.143838
0.127245
0.119512
0.12233
0.135041
0.155233
0.180412
0.208781
0.239208
0.271
0.320358

A
-0.78195
-0.59026
-0.46247
-0.33468
-0.20689
-0.0791
0.048682
0.176471
0.30426
0.432049
0.559838
0.687627
0.815416
0.943205
1.134895

Portfolio Weights
B
C
2.474307
2.128465
1.897904
1.667331
1.43677
1.206209
0.975659
0.745098
0.514537
0.283976
0.053414
-0.17715
-0.40771
-0.63827
-0.98412

-0.69236
-0.5382
-0.43543
-0.33265
-0.22988
-0.12711
-0.02434
0.078431
0.181204
0.283976
0.386748
0.48952
0.592292
0.695064
0.849228

0.3
0.25
0.2
0.15
Mean

Mean

0.1
0.05
0

F. Restricted Efficient Frontier (No short sales)

Mean

St. Dev
0.08
0.09
0.1
0.11
0.12
0.13
0.14
0.15
0.16
0.17
0.18
0.19
0.2

0.12
0.119583
0.12233
0.12758
0.135041
0.144371
0.155233
0.16733
0.180412
0.196214
0.223109
0.258736
0.3

A
5.43E-07
0.112566
0.176471
0.240365
0.30426
0.368154
0.432049
0.495943
0.559838
0.5
0.333333
0.166667
0

Portfolio Weights
B
C
0.999999
0.860384
0.745098
0.629817
0.514537
0.399256
0.283976
0.168695
0.053414
0
0
0
0

0
0.02705
0.078431
0.129817
0.181204
0.23259
0.283976
0.335362
0.386748
0.5
0.666667
0.833333
1

-0.05
-0.1

0.1

0.15

Unrestricted
Restricted
Stocks

0.15

0.2

0.25

St. dev

0.3

0.35

1
2
3

1
2
3

1
1
0.5
0.2

Correlations
2
0.5
1
0.4

1
0.2

Standard Deviations
2
3
0.12
0.3

1
0.04
0.012
0.012

Outputs
A
B
C
Delta
Gamma

70.37037
76.33333
83.11048
21.73721
0.317647

3
0.2
0.4
1

0
1
2
3
4
5
6
7
8
9
10
11

Efficient
Frontier
Curve
Standard Expected
Deviation Return
0.2
0.12
0.3
0.25
-0.0374
0.230922 -0.02518
0.212405 -0.01297
0.194608 -0.00076
0.177749 0.011457
0.16212 0.02367
0.148111 0.035884
0.136223 0.048097
0.127052 0.06031
0.121216 0.072524
0.119208 0.084737
0.121216 0.09695

0.25

1
1
1
1

0.2
0.15
0.1
0.05
0
0

0.05

0.1

-0.05

Variance and Covariance Matrix

2
3
0.012
0.012
0.0144
0.0144
0.0144
0.09

Index
Risky Asset 1
Risky Asset 2
Risky Asset 3
Trade-off Curve

Minimum Variance Frontier (3 risky

Expected Return

Portfolio Optimization: Three Risky Assets

One plus
Inputs
Expected Standard Exp Ret
Return
Deviation [1+E(r)]
Ones
Riskless Rate (r)
0.04
0
1.04
Risky Asset 1
0.14
0.2
1.14
Risky Asset 2
0.08
0.12
1.08
Risky Asset 3
0.2
0.3
1.2

Standard Devi

Efficient
Trade-off
Line
Expected
Return

Individual
Asset
Optimal Combination
Expected of Risky Assets
Return
(Tangent Portfolio)
0.14
1 0.705882
0.08
2 -0.21008
0.2
3 0.504202

12
13
14
15
16
17
18
19
20
Optimal Comb.
Eff Trade-off Line
Eff Trade-off Line
Eff Trade-off Line

0.127052
0.136223
0.148111
0.16212
0.177749
0.194608
0.212405
0.230922
0.25
0.213021
0
0
1 0.213021
2 0.426043

0.109163
0.121377
0.13359
0.145803
0.158017
0.17023
0.182443
0.194657
0.20687
0.182857
0.04
0.182857
0.325714

Portfolio Weights in Tangency Portf

riance Frontier (3 risky assets) & the CAL

0.80

Portfolio Weights

0.60

0.40
0.20
0.00
1

-0.20
0.15

0.2

0.25

0.3

0.35

-0.40
Standard Deviation

io Weights in Tangency Portfolio

Asset Number

0.705882
-0.21008
0.504202
#N/A
#N/A