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Creating Optimal Portfolio and the Efficient Frontier Using Microsoft Excel®

Journal: Journal of Quantitative Methods (Vol.2, No. 2)

Publication Date:

Authors : ;

Page : 103-136

Keywords : Optimal Portfolio; Efficient Frontier; Risk; Expected Return; Risk-free asset;

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Abstract

Portfolio managers and investors strive to achieve the best possible trade-off between risk and return, and one of the tools they use is constructing mean-variance efficient portfolios. Finance students learn about optimal portfolios and efficient frontiers, though it is difficult to replicate them unless they have access to sophisticated software. This paper develops a teaching module that uses Microsoft Excel® to create mean-variance portfolios and traces out the efficient frontier using real-world data. In the process, the students learn to determine optimal investment allocations in a portfolio, select the optimum investment portfolio given investor's objectives and preferences and learn about factors that influence different asset allocations. For multiple assets (N>3), the paper uses Matrix algebra in Excel®. The paper enables students and investors to learn how to construct real-world mean-variance efficient portfolios using Excel®.

Last modified: 2019-05-30 15:29:45