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3 Firm Portfolio Example
3 Firm Portfolio Example
3 Firm Portfolio Example
0.080
0.070
Tangency
Frontier
Portfolio ER
0.060
Nordstrom
Starbucks
0.050
Microsoft
Global Min
Microsoft
Tangency
0.040
Tan + T-bills
0.030
Starbucks
Efficient Frontier of Risky Assets
0.020
Global min
rf
0.010
Nordstrom
0.000
0.000
0.050
0.100
0.150
Portfolio SD
0.200
0.250
VaR Frontier
$107,500
$107,000
$106,500
$106,000
$105,500
$105,000
$104,500
$104,000
$103,500
$103,000
$102,500
$102,000
$-
$5,000
$10,000
$15,000
5% Portfolio VaR
$20,000
$25,000
mu
covmat
VAR(R)=varcov
0.011
0.003
0.003
0.020
0.002
0.001
0.002
0.001
0.010
Computing the Portfolio frontier for the risky assets is a multi-step process (Markowitz algorithm)
Step 1. Find the global minimum variance portfolio, compute its mean and variance
Step 2. Determine an efficent portfolio with target return equal to the largest expected return of the given set of a
mean and variance
Step 3. Compute the covariance between the returns on the global minimum variance portfolio found in step 1 an
the efficient portfolio found in step 2.
Step 4. Compute portfolio frontier using result that any portfolio on the frontier is a convex combination of any tw
portfolios.
Step 2
p1vec
Step 1
gvec
PORTFOLIO STATISTICS
E[Rp]
VAR(Rp) SD(Rp) Cov(Rp1,Rgmin)
Port 1
0.043
0.009
0.092
0.005
Global min
0.025
0.005
0.073
covp1gmin
mugmin vargmiin
Computing tangency portfolio using the solver
tvec
Tangency
tvec2
T-bill rate
0.01
Problem: maximize Sharpe slope = (x'm - rf)/sqrt(x'Sx) subject to x'1 = 1
x1
x2
x3
Constraint 1
E[Rp] - rf
Var(Rp)
Slope
-0.548
0.330
1.218
1.000
0.051
0.018
0.376
PORTFOLIO STATISTICS
E[Rp]
VAR(Rp) SD(Rp)
0.061
0.018
0.134
mutan
sdtan
Problem: maximize Sharpe slope = (x'm - rf)/sqrt(x'Sx) subject to x'1 = 1 and x(i) >= 0
x1
x2
x3
Constraint 1
E[Rp] - rf
Var(Rp)
Slope
0.000
0.190
0.810
1.000
0.030
0.008
0.342
PORTFOLIO STATISTICS
Tangency
E[Rp]
VAR(Rp) SD(Rp)
0.040
0.008
0.088
weights
0.800
0.600
0.400
0.200
0.000
-0.200
Nordstrom
Starbucks
Microsoft
assets
Weights
Starbucks
Assets
Microsoft
W0
$ 100,000
50000000 7071.0678
rkowitz algorithm)
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
Oct-98
Nov-98
Dec-98
Jan-99
Feb-99
Mar-99
Apr-99
May-99
mean
var
sd
Covariance Matrix
Nordstrom Starbucks Microsoft
Nordstrom
0.011
0.003
0.002
Starbucks
0.003
0.020
0.001
Microsoft
0.002
0.001
0.010
Correlation Matrix
Nordstrom Starbucks Microsoft
Nordstrom
1.000
0.176
0.174
Starbucks
0.003
1.000
0.001
Microsoft
0.174
0.079
1.000
Jun-99
Jul-99
Aug-99
Sep-99
Oct-99
Nov-99
Dec-99
Jan-00
-0.058
-0.064
-0.102
-0.047
-0.079
0.112
-0.055
-0.179
0.018
-0.480
-0.016
0.080
0.093
-0.023
-0.091
0.277
0.111
-0.050
0.076
-0.022
0.022
-0.017
0.249
-0.176