Equities E(R) SD Correlation Matrix

US Japan UK Germany France

US 10.2% 16.3% 1.000 0.743 0.886 0.796 0.833
Japan 6.5% 15.8% 0.743 1.000 0.668 0.686 0.822
UK 8.1% 21.6% 0.886 0.668 1.000 0.876 0.852
Germany 10.5% 23.7% 0.796 0.686 0.876 1.000 0.816
France 7.9% 17.8% 0.833 0.822 0.852 0.816 1.000
Rf 2% 0.0%
Rb 3% 0.0%

Soln
Bordered Covariance Matrix
Weights 3.937 -1.652 -2.923 1.265 0.374
Weights US Japan UK Germany France
3.937 US 0.027 0.019 0.031 0.031 0.024
-1.652 Japan 0.019 0.025 0.023 0.026 0.023
-2.923 UK 0.031 0.023 0.047 0.045 0.033
1.265 Germany 0.031 0.026 0.045 0.056 0.034
0.374 France 0.024 0.023 0.033 0.034 0.032
1.000 0.030 0.009 0.018 0.031 0.017

Mean 22.0% Portfolio Mean = Sumproduct (Weights, E(R))

S.D. 31.1% Portfolio SD = Sumproduct (Weights', D25: H25)
Sharpe Ratio 0.641 Sharpe Ratio = (Mean - Rf)/SD

Target Return 20.0% for solver

Ai Efficient Frontier with only US & Japan (Unconstrained)

Rf Low E(r) Min Var Optimal High E(r)
Return 5.0% 8.1% 10.0% 11.9% 15.0% 20.0%
S.D. 0% 17.9% 15.0% 16.1% 19.0% 26.1% 39.9%
Sharpe Ratio 0.168 0.409 0.498 0.520 0.498 0.451
US -0.405 0.439 0.946 1.460 2.297 3.649
Japan 1.405 0.561 0.054 -0.460 -1.297 -2.649
UK 0.000 0.000 0.000 0.000 0.000 0.000
Germany 0.000 0.000 0.000 0.000 0.000 0.000
France 0.000 0.000 0.000 0.000 0.000 0.000
CAL 2% 11.3% 9.8% 10.4% 11.9% 15.3% 21.7%
Optimal SR with Rb 0.470
(Mean* - Rb)/SD
CAL = Rf + Optimal Sharpe Ratio x SD Mean* is re-estimated after changing formula
 With leverage CAL = Rb + Optimal SR with Rb x SD for SR (based on Rb) in cell C27

Aii Efficient Frontier with 5 countries (Unconstrained)

Rf Low E(r) Min Var Optimal High E(r)
Return 5.0% 8.6% 12.0% 15.9% 20.0% 25.0%
S.D. 0% 16.1% 14.3% 16.0% 20.8% 27.6% 36.8%
Sharpe Ratio 0.186 0.460 0.627 0.668 0.652 0.625
US -0.022 0.814 1.611 2.514 3.477 4.643
Japan 1.083 0.505 -0.045 -0.669 -1.335 -2.140
UK 0.417 -0.288 -0.960 -1.722 -2.535 -3.519
Germany -0.545 -0.162 0.202 0.614 1.055 1.588
France 0.067 0.131 0.193 0.263 0.338 0.429
CAL 2% 12.8% 11.6% 12.7% 15.9% 20.2% 25.9%
Optimal SR with Rb 0.622

Aiii Actual = Expected Alternative Scenario

MVO Eq Wt MVO Eq Wt
Mean 15.9% 8.6% 3.3% 7.6%
S.D 20.8% 17.5% 20.8% 17.5%
Sharpe Ratio 0.668 0.380 0.063 0.323

Using Equal Weights appeared suboptimal based on forecasted returns

But results can vary significantly with mean-variance optimal portfolios due to riskier long-short p
 A. Without short sale constraints
i. Find the minimum variance, optimal & few other portfolios consisting only of US & Japan w
Plot the efficient frontier of risky assets.

ii. Find the minimum variance, optimal & few other portfolios consisting of 5 country equity
Plot the efficient frontier of risky assets as well as the capital allocation line for the optimum

iii. Compare the performance of the optimal portfolio with an equal-weight portfolio if
a. Actual performance is in line with expected performance
b. Actual performance is in line with expected, except for US where actual returns fall to 5.2

Covariance = Correlation x SD for row country (vlookup from data) x SD for column country (vlookup from data)

Sumproduct (Weights, D20:D24) copied across D25 to H25

25.0%

20.0%
Expected Return

15.0%

10.0%

5.0%

0.0%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0%
Standard Deviation

US and Japan CAL

after changing formula

 30.0%

25.0%

Expected Return
20.0%

15.0%

10.0%

5.0%

0.0%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0%
Standard Deviation

5 Countries CAL US and Japan

due to riskier long-short positions

ting only of US & Japan without any short sale constraints.

ting of 5 country equity portfolios without any short sale constraints.

on line for the optimum portfolio.

weight portfolio if

actual returns fall to 5.2%

 Equities E(R) SD Correlation Matrix
US Japan UK Germany France
US 10.2% 16.3% 1.000 0.743 0.886 0.796 0.833
Japan 6.5% 15.8% 0.743 1.000 0.668 0.686 0.822
UK 8.1% 21.6% 0.886 0.668 1.000 0.876 0.852
Germany 10.5% 23.7% 0.796 0.686 0.876 1.000 0.816
France 7.9% 17.8% 0.833 0.822 0.852 0.816 1.000
Rf 2% 0.0%
Rb 3% 0.0%

Soln
Bordered Covariance Matrix
Weights 1.000 0.000 0.000 0.000 0.000
Weights US Japan UK Germany France
1.000 US 0.027 0.019 0.031 0.031 0.024
0.000 Japan 0.019 0.025 0.023 0.026 0.023
0.000 UK 0.031 0.023 0.047 0.045 0.033
0.000 Germany 0.031 0.026 0.045 0.056 0.034
0.000 France 0.024 0.023 0.033 0.034 0.032
1.000 0.027 0.019 0.031 0.031 0.024

Mean 10.2%
S.D. 16.3%
Sharpe Ratio 0.503

Target Return 9.0% for solver

Bi Efficient Frontier without Short Sales

Rf Low E(r) Min Var Optimal High E(r)
Return 6.5% 8.1% 9.0% 10.2% 10.4% 10.5%
S.D. 0% 15.8% 15.0% 15.2% 16.3% 20.4% 23.7%
Sharpe Ratio 0.285 0.409 0.460 0.503 0.412 0.359
US 0.000 0.439 0.676 1.000 0.333 0.000
Japan 1.000 0.561 0.324 0.000 0.000 0.000
UK 0.000 0.000 0.000 0.000 0.000 0.000
Germany 0.000 0.000 0.000 0.000 0.667 1.000
France 0.000 0.000 0.000 0.000 0.000 0.000
CAL 2.0% 9.9% 9.5% 9.7% 10.2% 12.0% 13.5%
Optimal SR with Rb 0.442

Note that the optimal portfolio is concentrated & actually riskier if forecasts are uncertain.
Bii Optimum Weight in Risky Portfolio, Wp*

E(Rp) 10.2%
Rf 2.0%
A 5
σp 16.3%
Wp* 0.614
Final portfolio
W Rf 0.386
W US 0.614
W Japan 0.000
W UK 0.000
W Germany 0.000
W France 0.000

Biii Optimum Weight in Risky Portfolio, Wp*

E(Rp) 10.20%
Target Rc 10%
Rf 2%
Wp* 0.976
Final Portfolio
W Rf 0.024
W US 0.976
W Japan 0.000
W UK 0.000
W Germany 0.000
W France 0.000
 B. With short sale constraints
i. Find the minimum variance, optimal & few other portfolios consisting of 5 country equity
Plot the efficient frontier of risky assets.

ii. Find the optimal portfolio for an investor with risk aversion A = 5, assuming short sale con

iii. Find the optimal complete portfolio for an investor with a target retun of 10%, assuming

30.0%

25.0%
Expected Return

20.0%

15.0%

10.0%

5.0%

0.0%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
Standard Deviation

5 Countries with Constraints CAL

5 Countries Without Constraints
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
Standard Deviation

5 Countries with Constraints CAL

5 Countries Without Constraints
ting of 5 country equity portfolios with short sale constraints.

assuming short sale constraints.

retun of 10%, assuming short sale constraints