Portfolio Frontier

12.00%

10.00%

8.00%
Nordstrom
Efficient frontier of risky Microsoft
ER

assets Starbucks
6.00% global min
Tangenc
tangency
y
tangency + T-bills
Microsoft
frontier
4.00% Efficient frontier of
T-Bills and risky
assets Starbuck
Global s
2.00% min

Nordstrom
0.00%
0.00% 5.00% 10.00% 15.00% 20.00% 25.00%
SD
asset muvec sigma microsoft nordstrom starbucks
microsoft 4.27% microsoft 0.010 0.002 0.001
nordstrom 0.15% nordstrom 0.002 0.011 0.003
starbucks 2.85% starbucks 0.001 0.003 0.020

Compte global minimum variance portfolio using matrix algebra and solver
asset share mvec constraint var(Rp,m)
microsoft m_msft 44% 1 0.0053
nordstrom m_nord 36%
starbucks m_star 19%
 2p ,m  mm
E[Rp.m] 2.50%
SD(Rp,m) 7.27%  p ,m  m

0.0249839
100%

80%

weight
Weights in Global Minimum Variance Portfolio 60%

40%
50%
weights

45% 20%
40%
0%
35%
30% -20%
25% micr
20%
15%
10%
5%
0%
microsoft nordstrom starbucks
assets

Compute tangency portfolio using solver and matrix algebra

asset share tvec constraint E[Rp,t]-rf Var(Rp,t) slope
microsoft t_msft 103% 1 4.685% 0.0124 0.42104
nordstrom t_nord -32%
starbucks t_star 30%
E[Rp,t] 5.185% t   rf
SD(Rp,t) 11%
 t t 
1/ 2

Weights in Tangency Portfolio

120%

100%
weights

80%

60%

40%

20%

0%

-20%

-40%
 Weights in Tangency Portfolio

120%

100%

weights
80%

60%

40%

20%

0%

-20%

-40%
microsoft nordstrom starbucks
asset
 rf
0.005

compute efficient portfolio with expected return = Microsoft average return

asset share yvec constraint target return E[Rp,y] var(Rp,y) SD(Rp,y)
microsoft y_msft 83% 1 4.27% 4.27% 0.0084 9%
nordstrom y_nord -9%
starbucks y_star 26%

Weights in Efficient Portfolio

100%
z    m  (1   )  y
80%
weight

60% alpha 1-alpha E[Rp,z]

40% 1 0 2.50%
20% 0.9 0.1 2.68%
0% 0.8 0.2 2.85%
-20% 0.7 0.3 3.03%
microsoft nordstrom starbucks 0.6 0.4 3.21%
asset
0.5 0.5 3.38%
0.4 0.6 3.56%
0.3 0.7 3.74%
0.2 0.8 3.92%
0.1 0.9 4.09%
0 1 4.27%
-0.1 1.1 4.45%
Tangency + T-bills -0.2 1.2 4.63%
xt E[Rp] SD(Rp) -0.3 1.3 4.80%
0 0.50% 0.00% -0.4 1.4 4.98%
0.1 0.97% 1.11% -0.5 1.5 5.16%
0.2 1.44% 2.23% -0.6 1.6 5.33%
0.3 1.91% 3.34% -0.7 1.7 5.51%
0.4 2.37% 4.45% -0.8 1.8 5.69%
0.5 2.84% 5.56% -0.9 1.9 5.87%
0.6 3.31% 6.68% -1 2 6.04%
0.7 3.78% 7.79% -1.1 2.1 6.22%
0.8 4.25% 8.90% -1.2 2.2 6.40%
0.9 4.72% 10.02% -1.3 2.3 6.58%
1 5.19% 11.13% -1.4 2.4 6.75%
1.1 5.65% 12.24% -1.5 2.5 6.93%
1.2 6.12% 13.35% -1.6 2.6 7.11%
1.3 6.59% 14.47% -1.7 2.7 7.28%
1.4 7.06% 15.58% -1.8 2.8 7.46%
1.5 7.53% 16.69% -1.9 2.9 7.64%
1.6 8.00% 17.80% -2 3 7.82%
1.7 8.47% 18.92%
1.8 8.93% 20.03%
1.9 9.40% 21.14%
2 9.87% 22.26%
 cov(Rp,m,Rp,y)
SD(Rp,y) 0.005282

 m, y  my

  m  (1   )  y Frontier Portfolios
microsoft nordstrom starbucks
var(Rp,z) SD(Rp,z)
0.005282 7.27% 44% 36% 19%
0.005313 7.29% 48% 32% 20%
0.005406 7.35% 52% 27% 21%
0.00556 7.46% 56% 23% 21%
0.005777 7.60% 60% 18% 22%
0.006055 7.78% 64% 14% 23%
0.006395 8.00% 67% 9% 23%
0.006797 8.24% 71% 5% 24%
0.007261 8.52% 75% 0% 25%
0.007786 8.82% 79% -5% 26%
0.008373 9.15% 83% -9% 26%
0.009023 9.50% 87% -14% 27%
0.009734 9.87% 91% -18% 28%
0.010506 10.25% 94% -23% 28%
0.011341 10.65% 98% -27% 29%
0.012237 11.06% 102% -32% 30%
0.013196 11.49% 106% -36% 30%
0.014216 11.92% 110% -41% 31%
0.015298 12.37% 114% -45% 32%
0.016441 12.82% 118% -50% 32%
0.017647 13.28% 121% -54% 33%
0.018914 13.75% 125% -59% 34%
0.020244 14.23% 129% -64% 34%
0.021635 14.71% 133% -68% 35%
0.023087 15.19% 137% -73% 36%
0.024602 15.69% 141% -77% 36%
0.026179 16.18% 145% -82% 37%
0.027817 16.68% 149% -86% 38%
0.029517 17.18% 152% -91% 38%
0.031279 17.69% 156% -95% 39%
0.033103 18.19% 160% -100% 40%
Efficient portfolio with E[Rp]= microsoft and no short sales
constraint target return E[Rp,w] var(Rp,w)
microsoft wa 100% 1 4.27% 4.27% 0.0100
nordstrom wb 0%
starbucks wc 0%

Weights in efficient portfolio with same E[R] as Microsoft

weights

120%
100%
80%
60%
40%
20%
0%
microsoft nordstrom starbucks
assets
SD(Rp,w)
10%
 Nordstrom Starbucks Microsoft CER Model Estimates
Mar-95 -3.62% 0.52% 12.13%
Apr-95 -5.68% -2.11% 13.92%
May-95 7.82% 21.24% 3.53% Average
Jun-95 -0.30% 20.36% 6.50% Standard Deviation
Jul-95 -2.76% 4.80% 0.14% Variance
Aug-95 2.77% 6.79% 2.19%
Sep-95 1.20% -5.46% -2.19% Covraiance matrix
Oct-95 -11.91% 3.57% 9.98%
Nov-95 6.04% 7.37% -13.78%
Dec-95 3.14% -0.59% 0.72%
Jan-96 -3.14% -22.61% 5.27% Correlation matrix
Feb-96 14.24% 5.09% 6.47%
Mar-96 7.08% 27.97% 4.40%
Apr-96 4.91% 15.15% 9.37%
May-96 0.49% 0.00% 4.74%
Jun-96 -13.63% 4.06% 1.15%
Jul-96 -6.98% -8.30% -1.89% xvec
Aug-96 -5.89% 23.08% 3.85% 0.5
Sep-96 -2.60% 0.76% 7.37% 0.25
Oct-96 -5.23% -1.53% 3.99% 0.25
Nov-96 19.04% 6.33% 13.36%
Dec-96 -20.50% -19.03% 5.20%
Jan-97 4.65% 17.94% 21.07%
Feb-97 -0.67% -1.84% -4.51%
Mar-97 3.01% -12.67% -6.15%
Apr-97 3.57% 0.84% 28.15%
May-97 20.39% 5.30% 2.04%
Jun-97 2.19% 21.20% 1.90%
Jul-97 14.45% 5.01% 11.22%
Aug-97 3.39% 0.15% -6.72%
Sep-97 8.59% 1.96% 0.09%
Oct-97 -4.00% -23.67% -1.76%
Nov-97 -3.50% 5.53% 8.48%
Dec-97 2.30% 9.56% -9.06%
Jan-98 -17.12% -4.84% 14.35%
Feb-98 12.21% 7.89% 12.76%
Mar-98 10.69% 13.57% 5.45%
Apr-98 2.51% 6.02% 0.70%
May-98 9.84% -0.26% -6.08%
Jun-98 6.95% 10.73% 24.52%
Jul-98 -21.29% -24.38% 1.43%
Aug-98 -3.96% -28.27% -13.62%
Sep-98 -19.03% 13.67% 13.73%
Oct-98 9.85% 18.12% -3.88%
Nov-98 31.25% 6.15% 14.18%
Dec-98 -7.13% 19.62% 12.82%
Jan-99 18.23% -7.51% 23.26%
Feb-99 -3.17% 1.55% -15.33%
Mar-99 1.54% 5.97% 17.73%
Apr-99 -14.98% 27.48% -9.73%
May-99 1.13% -0.17% -0.77%
Jun-99 -5.80% 1.85% 11.13%
Jul-99 -6.35% -47.97% -4.97%
Aug-99 -10.22% -1.63% 7.57%
Sep-99 -4.75% 8.00% -2.18%
Oct-99 -7.95% 9.27% 2.18%
Nov-99 11.22% -2.33% -1.65%
Dec-99 -5.54% -9.11% 24.87%
Jan-00 -17.90% 27.73% -17.63%
 Univariate Statistics
rmsft rnord rsbux
4.27% 0.15% 2.85%
10.06% 10.55% 14.22%
0.01 0.01 0.02

Nordstrom Starbucks Microsoft

Nordstrom 0.011 0.003 0.002
Starbucks 0.003 0.020 0.001
Microsoft 0.002 0.001 0.010

Nordstrom Starbucks Microsoft

Nordstrom 1.000 0.176 0.174
Starbucks 0.176 1.000 0.079
Microsoft 0.174 0.079 1.000
A
1 2 1 3
3 4 2 4

B 2*matA
5 6 2 4
7 8 6 8

A+B A*B
6 8 19 22
10 12 43 50

A-B I2
-4 -4 1 0
-4 -4 0 1.00

1 2
3 4
Ainv
-2 1
1.5 -0.5
test
1 0
0 1

x_vec one_vec x'1

1 1 10 10
2 1
3 1
4 1