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1. HISTORICAL DATA
S&P 500
D0A0
DM
EM
$5.00
$4.80
$4.60
$4.40
$4.20
$4.00
Rusell 2000
Annualized
Data
S&P
500
D0A0
Russ
ell
2000
DM
EM
Mean %
7.85
4.37
8.69
(4.35
)
(4.36)
Std.
Deviation %
11.70
2.97
14.81
15.06
19.69
Variance %
1.37
0.09
2.19
2.28
3.88
S&P
500
D0A0
Russ
ell
2000
DM
EM
Median %
3.57
0.98
18.83
(16.8
)
(21.5)
Maximum %
101.2
26.9
95.8
88.8
176.1
Minimum %
(72.4
)
(13.1
)
(105.
5)
(92.2
)
(114.
2)
Matrix
(Annuali
zed)
2000
S&P 500
0.013
7
0.000
5
0.014
3
0.014
8
0.015
2
D0A0
0.000
5
0.000
9
0.001
2
0.000
8
0.000
3
Russell
2000
0.014
3
0.021
9
0.014
7
0.015
4
0.014
7
0.022
7
0.022
6
0.015
4
0.022
6
0.038
8
0.001
2
0.000
8
0.000
3
Correlat
ion
Matrix
S&P
500
D0A0
Russe
ll
2000
DM
EM
DM
0.014
8
S&P 500
1.000
0
0.143
5
0.823
2
0.839
2
0.660
3
EM
0.015
2
D0A0
0.143
5
1.000
0
0.271
6
0.172
1
0.049
9
Russell
2000
0.823
2
1.000
0
0.661
4
0.528
1
DM
0.839
2
0.661
4
1.000
0
0.763
4
EM
0.660
3
0.528
1
0.763
4
1.000
0
Russ
ell
DM
EM
Covarian
ce
S&P
500
0.271
6
0.172
1
0.049
9
D0A0
Weightages
(%)
S&P
D0A0
500
100
0
90
10
80
20
70
30
60
40
50
50
Portfolio
Return
(%)
Portfolio
Variance
(%)
5.90
5.54
5.18
4.82
4.46
4.10
1.37
1.10
0.86
0.66
0.48
0.34
Portfolio
Standard
Deviation
(%)
11.71
10.50
9.30
8.11
6.95
5.83
60
70
80
90
100
3.74
3.38
3.02
2.66
2.30
0.23
0.15
0.10
0.08
0.09
4.76
3.82
3.09
2.76
2.97
4.000%
7.000%
6.000%
2.000%
5.000%
1.000%
4.000%
0.000%
0.00% 5.00% 10.00% 15.00%
Portfolio Risk
1.000%
0.000%
0.00%
0.50%
1.00%
Portfolio Variance
1.50%
Portfolio
Return
(%)
Portfolio
Variance
(%)
Portfolio
Std. Dev
(%)
2.619
0.08
2.76
2.70%
2.60%
2.50%
Return 2.40%
2.30%
2.20%
2.10%
0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00%
Risk
5.00%
4.50%
4.00%
3.50%
3.00%
Return 2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
0% 1% 2% 3% 4% 5% 6% 7% 8%
Risk
Portfolio
Return
(%)
Portfolio
Std. Dev
(%)
Sharpe
Ratio2
4.48
7.02
0.3135
Weight: Optimal
Portfolio
S&P 500
D0A0
20%
13%
6.000%
5.000%
67%
Comment:
As sentiments of investors become more risk
averse, portfolio weightages have shifted towards
risk-free assets, as depicted in F. Therefore, if
investors become more and more risk averse, then
their majority of investments will be in risk free
assets.
4.000%
3.000%
2.000%
1.000%
0.000%
0.00%
Weight: Risk-free
Asset
5.00%
10.00%
15.00%
Portfolio3
Portfolio Return
(%)
A
B
C
D
E
F
G
H
I
J
7.20
5.50
5.24
4.70
4.40
4.00
3.50
3.20
3.02
2.95
Portfolio
Standard
Deviation
(%)
16.89
12.00
11.84
9.30
8.50
5.45
4.03
3.32
4.00
4.21
10.00%
15.00%
20.00%
5.00%
Weightages (%)
Russell
D0A0
DM
2000
91
7
2
Portfolio
Return
(%)
Portfolio
Variance
(%)
2.64
0.07
EM
0
Portfolio
Standard
Deviation
(%)
2.66
Tangent Portfolio
2.70%
5.00%
2.60%
4.00%
2.50%
2.40%
3.00%
2.30%
2.00%
2.20%
1.00%
2.10%
2.00%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
0.00%
0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00%
Weightages (%)
Russell
D0A0
DM
2000
46
11
(1)
Portfolio
Standard
Deviation
(%)
6.33
EM
(2)
Sharpe Ratio
0.3174
7.00%
6.00%
5.00%
Portfolio4
4.00%
3.00%
A
B
1.00%
C
0.00%
0.00%
5.00%
10.00%
15.00%
20.00%
D
E
F
G
E. Optimal Allocation between risk free asset
H
and Optimal Risky Portfolio
I
Weight: Optimal Portfolio
Weight: Risk-free JAsset
60%
2.00%
Portfolio Return
(%)
5.50
5.30
5.00
4.70
4.40
4.00
3.50
3.20
3.02
2.95
Portfolio
Standard
Deviation
(%)
12.00
11.00
10.00
9.30
8.50
5.45
4.03
3.32
4.00
4.21
S&P 500
D0A0
27.7%
27.5%
Russell
2000
6.7%
DM
EM
(0.6%)
(1.3%)
4 Portfolio weightages have been worked using Solver
in excel. Detailed working has also been documented.
S&P
500
0
2.00%
1.00%
0.00%
2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00%
Portfolio
Return
(%)
Portfolio
Variance
(%)
2.64
0.07
EM
0
Portfolio
Standard
Deviation
(%)
2.66
Commentary:
By short selling in Part 3, Portfolio returns are
maximized; however, it also brings higher risk as
compared to a portfolio in which short selling is not
allowed.
B. Global Minimal-Variance Portfolio
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
Commentary:
The weightages under both the scenarios are
similar and within limits for minimal variance
portfolio, therefore no variation is observed.
C. Tangent Portfolio, CAL of the Optimal Risky
Portfolio and Sharpe Ratio
Weightages (%)
Russell
D0A0
DM
2000
45
11
0
Portfolio
Standard
Deviation
(%)
6.47
EM
4.00%
3.00%
2.00%
Sharpe Ratio
0.3168
Tangent Portfolio
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00%
1.00%
0.00%
0.00%
5.00%
10.00%
15.00%
Commentary:
The portfolio is limited to assets without short
selling; thus we know that:
a. Portfolio Return (no short selling) is higher than
return of portfolio (where short selling was
allowed).
b. Sharpe Ratio for portfolio (with short selling) is
greater than the ratio for this portfolio.
Weighta
ges
Volatilit
y
Contributi
on to
Portfolio
Risk
Risk
Weight
S&P 500
0.11
11.71%
8.30%
21.06%
D0A0
0.71
2.97%
13.03%
33.07%
Russell
2000
0.09
14.81%
8.27%
20.99%
DM
0.05
15.06%
4.51%
11.45%
EM
0.04
19.69%
5.29%
13.43%
S&P 500
D0A0
DM
EM
Russell 2000
Weighta
ges
Volatilit
y
Contributi
on to
Portfolio
Risk
Risk
Weight
S&P 500
0.11
11.71%
4.65%
20.00%
D0A0
0.43
2.97%
4.65%
20.00%
Russell
2000
0.09
14.81%
4.65%
20.00%
DM
0.08
15.06%
4.65%
20.00%
EM
0.06
19.69%
4.65%
20.00%
S&P 500
D0A0
DM
EM
Russell 2000
Weighta
ges
Volatilit
y
Contributi
on to
Portfolio
Risk
Risk
Weight
S&P 500
0.06
11.71%
8.83%
22.42%
D0A0
0.86
2.97%
34.83%
88.41%
Russell
2000
0.03
14.81%
6.98%
17.73%
DM
0.03
15.06%
6.87%
17.43%
EM
0.02
19.69%
5.25%
13.33%
S&P 500
D0A0
DM
EM
Russell 2000
Weighta
ges
Volatilit
y
Contributi
on to
Portfolio
Risk
Risk
Weight
S&P 500
0.14
11.71%
6.59%
28.31%
D0A0
0.55
2.97%
6.59%
28.31%
Russell
2000
0.11
14.81%
6.59%
28.31%
DM
0.11
15.06%
6.59%
28.31%
Portfolio
Weighta
ges
Volatilit
y
Contributi
on to
Portfolio
Risk
Risk
Weight
EM
0.08
19.69%
6.59%
28.31%
S&P 500
D0A0
DM
EM
Russell 2000
USD
(Millions)
581,155
Weights
(%)
Ref
0.78
W1
31.23
W2
0.01
W3
Commentary:
It is evident that Portfolio computed based on SOLVER
(Part 3C) is less risky and has a greater Sharpe Ratio
as compared to the Portfolio based on Market
Capitalization weights.
Variance of value-weighted
12.14%^2 = 1.47%
portfolio is
^2
i.e.
23,286,856
5,872
DM
13,434,409
18.02
W4
EM
37,256,308
49.97
W5
12.14
0.01
0.31
0.00
0.18
0.50 4.94%
%
Portfolio (Optimal Risky Portfolio) Part 3C
W1
W2
W3
W4
W5
E (r)
0.11
(0.01) (0.02) 4.29% 6.33%
0.46
0.46
8.57%