OptimisationExercise - Solved
OptimisationExercise - Solved
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
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)
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
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
weight portfolio if
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
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
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