Here's what I did: See http://home.golden.net/~pjponzo/Frontier-math.

htm
1
2
3
4
5
Here's what YOU do:
1

(on the sheet labelled MPT)

3
Of course, you'd like to vary the Prescribed Return ... and identify the minimum Standard Deviation for each choice, eh?
That's where the Calculate Frontier button comes in:

NOTE:

Here's what I did: See http://home.golden.net/~pjponzo/Frontier-math.htm

Got the 120 monthly returns for 24 asset classes (1986 to 1996), from http://www.???
Found the Mean (for each of the 24 classes) and calculated the 120 deviations from this Mean (for each class).
Constructed a 24 x 120 matrix of these deviations: G (rows = 24 asset class, columns = 120 months)
Constructed a 24 x 24 matrix: W = G x G(transpose) whose elements contain the products of the deviations.
(This 24 x 24 matrix is located on the "Covariance" sheet labelled: Cov)
Here's what YOU do: (on the sheet labelled MPT)
Select three asset classes by choosing three numbers from 1 to 24 in cells C5, D5, E5.
(The spreadsheet will identify the three classes and extract the pertinent 3 x 3 Covariance matrix from the Cov sheet.)
Select some Prescribed Return in cell L5: Note that the return is a MONTHLY return!
(The spreadsheet will then solve the Equations, which, in fact, lie beneath the right-most chart on the MPT sheet!)
(The spreadsheet will plot the Quadratic which gives the sum of squares of deviations for the selected portfolio.)
Stare in awe and admiration at the left-most chart ... it's the Quadratic: Q versus x (x = the fraction of asset #1.)
(The Quadratic minimum is identified on the chart. It's value is located in cell N20.)
Of course, you'd like to vary the Prescribed Return ... and identify the minimum Standard Deviation for each choice, eh?
That's where the Calculate Frontier button comes in:
This button will vary the contents of L5 from the minimum Return (of the three chosen assets classes) to the maximum.
(Watch cell L5 and you can see these Return values flash by ... and, for each, the Quadratic gets plotted, quickly!)
For each Return (in L5), its value and the Quadratic minimum is stuck along rows 27 and 28 (columns N to AH.)
Row 29 generates an "Annualized" Standard Deviation (from the Q minima in row 28).
The right-most chart plots the Returns (along row 27) versus the Standard Deviation (along row 29).
When the macro (initiated by the Calculate Frontier button) has finished, it restores the contents of cell L5.
There is a money-back guarantee on the accuracy and validity of this spreadsheet.
(I have no idea if this stuff is useful ... but it's FUN!)

m the Cov sheet.)

e MPT sheet!)

ach choice, eh?

) to the maximum.
ted, quickly!)

Odds 'n' Ends:

These three numbers are the (approximate)
annualized returns for each asset class selected.
(Just gaze at them ... then ignore them)

If your Prescribed Return equals the maximum for the three asset classes,
then the Quadratic chart should say: 100% for that asset class, like so:

The Frontier chart doesn't change when you change the Prescribed Return.
It only depends upon the selected asset classes (and their parameters).

S&P500

U.S. Small

US Corp Bond

US Gov Bond

30-day TBill

Europe

EAFE

Monthly Means =

1.19%

1.11%

0.79%

0.80%

0.45%

1.11%

1.03%

1.04%

Volatilities =

14.68%

17.25%

6.87%

8.95%

0.49%

16.06%

18.54%

14.71%

24

Pick three numbers from THIS list

S&P500

U.S. Small

Gold

You picked these

Covariance
Matrix
S&P500
U.S. Small
Gold

1.19

1.11

0.17

14.68

17.25

12.22

14.0%

12.6%

1.3%

S&P500

U.S. Small

Gold

0.215
0.201
-0.057

0.201
0.298
-0.066

-0.057
-0.066
0.149

Q = (0.131) x^2 + (-0.251) x+ (0.302)

30%

Prescribed Return =

Equations:
(1) x(7.7%,
+ y + 0.58)
z=1
Fractions add to total portfolio
x=30%
y=11%
z=59%
(2)
1.185x
+ 1.114y
+ 0.170z = 1.120
Prescribed Return =1.12
1.4
(3) Q =0.215x^2 + 0.298y^2 + 0.149z^2 + 0.402xy + -0.114xz + -0.132yz
1.2
From (2), solve for
(4) z = (1.120 - 1.185x - 1.114y)/0.170 = 6.585 - (6.970)x - (6.548)y
1.0
Substitute z into (1) :
0.8
(5) -5.970x + -5.548y = -5.585
Solve for y, from (5), and get:
0.6
(6) y = 1.007 - (1.076)x
0.4
Substitute y into (4):
0.2
(7) z = -0.007 - (-0.076)x
0% Substitute
2%
4% z from 6%
10%
y and
(6) and (7)8%
into (3) to
get the 12%
quadratic, Q, in x
Q = (0.131) x^2 (Annualized)
+ (-0.251) x+ Portfolio
(0.302) Standard Deviation
1.6

25%
20%
15%

Prescribed Monthly Return

Means =
SDs =

World

10%

NOTE:

Identifies Minimum for Return = 1.120 : 90% + 4% + 6%

5%

Change ONLY the 4 numbers within a

100%

90%

80%

70%

60%

50%

40%

30%

10%

0%

20%

Quadratic versus Percentage S&P500

0%

Note: Play, but don't expect miracles ...

Pacific

Far East

Nordic

N.America

Euro x UK

Pac x Japan

EAFE x Japan

EAFE x UK

10

11

12

13

14

15

16

17

1.04%

1.05%

1.34%

1.16%

1.08%

1.63%

1.20%

1.02%

1.14%

25.20%

18.85%

14.44%

16.16%

23.10%

16.16%

19.66%

14.03%

24.27%

Prescribed Return =

Wld x Japan

1.1200
See: http://home.golden.net/~pjponzo/Efficient-Frontier.htm

Frontier
Prescribed Return =1.12

y = ( (1-ret/m_3)/(1-m_2/m_3) ) - ( (1-m_1/m_3)/(1-m_2/m_3) )*x

z = ( (1-ret/m_2)/(1-m_3/m_2) ) - ( (1-m_1/m_2)/(1-m_3/m_2) )*x

+ 0.402xy + -0.114xz + -0.132yz

= 6.585 - (6.970)x - (6.548)y

o (3) to get the 12%

quadratic,14%
Q, in x

andard Deviation

box

16%

Q = w1_1*x^2+w2_2*y^2+w3_3*z^2+2*w1_2*x*y+2*w1_3*x*z+2*w2_3*y*z
L = 0.131
M = -0.251
N = 0.302
Quadratic versus Percentage S&P500
Identifies Minimum for Return = 1.120 : 90% + 4% + 6%
100.000
100.000
0.279
0.268
0.258
0.248
x
0.000
0.050
0.100
0.150
0.200
0.250
y
1.007
0.953
0.899
0.845
0.792
0.738
z
-0.007
-0.003
0.001
0.005
0.008
0.012
Quadratic
-99.000
-99.000
0.279
0.268
0.258
0.248
Min(Q) =
0.183
19
90%
4%
6%
Optimal(SD) =
Checks
-99
-99
-99
-99
-99
-99
y<0?

z<0?

1.000
1.120
1.120
0.170
0.149
12.2%
-99
0.576
0.05066107
0
0.0%
0.0%
100.0%

1.000
1.120

1.000
1.120

1.000
1.120

1.000
1.120

1.000
1.120

x+y+z = 1 ?
Return ?

Return =
Returns =
Min(Q) =
Min(SD) =
Plot(Optimal)
MIN(SD)
B=
K=
x=
y=
z=

0.221
0.272
0.322
0.373
0.424
0.128
0.110
0.095
0.083
0.074
11.3%
10.5%
9.7%
9.1%
8.6%
-99
-99
-99
-99
-99
9
(x,y,z)@Min(SD)
x=30% y=11% z=59%
0.03456066 0.01846025 0.00235984 -0.01374057 -0.02984099
0
0
0
0.00036043 0.0016777
0.0%
0.0%
0.0%
5.5%
12.8%
5.4%
10.8%
16.1%
15.6%
13.1%
94.6%
89.2%
83.9%
78.9%
74.1%

Wld x UK

Wld x US

Japan

UK

USA

Composite

18

19

20

21

22

23

24

1.00%

1.02%

0.52%

1.15%

1.19%

1.23%

0.17%

14.72%

18.06%

22.35%

18.05%

14.59%

23.08%

12.22%

0.216
0.450
0.522
0.028
0.216
(7.7%, 0.58)
-99

0.210
0.500
0.469
0.031
0.210

0.204
0.550
0.415
0.035
0.204

0.199
0.600
0.361
0.039
0.199

0.195
0.650
0.307
0.043
0.195

0.191
0.700
0.253
0.047
0.191

Frontier
Return = 1.120 : 90% + 4% + 6%
90% + 4% + 6%
0.239
0.231
0.223
0.300
0.350
0.400
0.684
0.630
0.576
0.016
0.020
0.024
0.239
0.231
0.223
7.7%
Optimal(R) = 0.57621667
-99
-99
-99

Gold

-99

-99

-99

-99

-99

1.000
1.120

1.000
1.120

1.000
1.120

1.000
1.120

1.000
1.120

1.000
1.120

1.000
1.120

1.000
1.120

1.000
1.120

0.475
0.067
8.2%
-99

0.525
0.062
7.9%
-99

0.576
0.060
7.7%
0.57621667

0.627
0.060
7.7%
-99

0.678
0.062
7.9%
-99

0.729
0.067
8.2%
-99

0.779
0.074
8.6%
-99

0.830
0.083
9.1%
-99

0.881
0.095
9.7%
-99

-0.0459414 -0.06204181 -0.07814222 -0.09424263 -0.11034304 -0.12644345 -0.14254386 -0.15864428 -0.17474469

0.00396268 0.00734546 0.01168507 0.01698153 0.02323483 0.03056174 0.03888054 0.04815619 0.05838867
20.0%
25.0%
30.0%
37.1%
44.5%
50.0%
55.0%
61.4%
68.8%
10.8%
10.8%
10.8%
8.5%
6.0%
5.4%
5.4%
3.8%
1.3%
69.2%
64.2%
59.2%
54.4%
49.6%
44.6%
39.6%
34.7%
29.9%

0.188
0.750
0.200
0.050
0.188

0.186
0.800
0.146
0.054
0.186

0.184
0.850
0.092
0.058
0.184

0.183
0.900
0.038
0.062
0.183

100.000
0.950
-0.016
0.066
-99.000

100.000
1.000
-0.069
0.069
-99.000

-99

-99

-99

0.18273576

-99

-99

1.000
1.120

1.000
1.120

1.000
1.120

1.000
1.120

1.000
1.120

1.000
1.120

0.932
0.109
10.4%
-99

0.982
0.126
11.2%
-99

1.033
0.145
12.0%
-99

1.084
0.166
12.9%
-99

1.135
0.189
13.8%
-99

1.18541667
0.21547036
14.7%
-99

-0.1908451 -0.20694551 -0.22304592 -0.23914633 -0.25524674 -0.27134716

0.06964886 0.08194685 0.09520168 0.10941335 0.12458186 0.14070722
75.0%
80.0%
85.7%
93.1%
100.4%
107.7%
0.0%
0.0%
-0.8%
-3.3%
-5.8%
-8.3%
25.0%
20.0%
15.1%
10.2%
5.4%
0.6%

24x24

Covariance

Matrix

S&P500

U.S. Small

US Corp BondUS Gov Bond30-day TBill Europe

7
EAFE

8
World

10

Pacific

Far East

S&P500

0.2155

0.2009

0.0321

0.0427

0.0000

0.1587

0.1190

0.1549

0.0930

0.0885

U.S. Small

0.2009

0.2976

0.0115

0.0116

-0.0016

0.1384

0.1046

0.1414

0.0824

0.0752

US Corp Bond

0.0321

0.0115

0.0472

0.0589

0.0004

0.0167

0.0093

0.0171

0.0044

0.0055

US Gov Bond

0.0427

0.0116

0.0589

0.0802

0.0004

0.0253

0.0128

0.0231

0.0044

0.0061

30-day TBill

0.0000

-0.0016

0.0004

0.0004

0.0002

0.0001

-0.0006

-0.0004

-0.0011

-0.0010

Europe

0.1587

0.1384

0.0167

0.0253

0.0001

0.2581

0.2312

0.2026

0.2163

0.2168

EAFE

0.1190

0.1046

0.0093

0.0128

-0.0006

0.2312

0.3436

0.2558

0.4286

0.4411

World

0.1549

0.1414

0.0171

0.0231

-0.0004

0.2026

0.2558

0.2163

0.2971

0.3027

Pacific

0.0930

0.0824

0.0044

0.0044

-0.0011

0.2163

0.4286

0.2971

0.5888

0.6107

10

Far East

0.0885

0.0752

0.0055

0.0061

-0.0010

0.2168

0.4411

0.3027

0.6107

0.6350

11

Nordic

0.1444

0.1615

0.0054

0.0095

-0.0003

0.2334

0.2349

0.2006

0.2393

0.2390

12

N.America

0.2115

0.1976

0.0311

0.0412

0.0000

0.1562

0.1174

0.1528

0.0922

0.0875

13

Euro x UK

0.1381

0.1238

0.0170

0.0237

0.0002

0.2448

0.2198

0.1879

0.2071

0.2088

14

Pac x Japan

0.1953

0.2279

-0.0084

-0.0167

-0.0017

0.2256

0.1945

0.1970

0.1733

0.1581

15

EAFE x Japan

0.1649

0.1506

0.0139

0.0205

-0.0001

0.2563

0.2288

0.2038

0.2129

0.2115

16

EAFE x UK

0.1057

0.0943

0.0080

0.0102

-0.0007

0.2228

0.3611

0.2614

0.4657

0.4809

17

Wld x Japan

0.1917

0.1776

0.0236

0.0320

-0.0001

0.2000

0.1661

0.1754

0.1450

0.1417

18

Wld x UK

0.1511

0.1394

0.0171

0.0226

-0.0005

0.1947

0.2563

0.2152

0.3039

0.3102

19

Wld x US

0.1211

0.1079

0.0092

0.0124

-0.0006

0.2277

0.3345

0.2512

0.4155

0.4272

20

Japan

0.1036

0.1185

0.0066

0.0070

-0.0006

0.1690

0.3479

0.2510

0.4862

0.5034

21

UK

0.2035

0.2037

0.0189

0.0290

-0.0006

0.2024

0.1551

0.1722

0.1260

0.1200

22

USA

0.2139

0.1984

0.0322

0.0430

0.0000

0.1566

0.1162

0.1529

0.0897

0.0852

23

Composite

0.1145

0.1629

-0.0300

-0.0359

-0.0010

0.1151

0.1140

0.1143

0.1145

0.1096

24

Gold

-0.0570

-0.0659

-0.0204

-0.0258

-0.0004

-0.0282

0.0131

-0.0113

0.0389

0.0388

11
Nordic

12

13

14

15

16

Pac x Japan EAFE x JapanEAFE x UK

17

18

Wld x Japan Wld x UK

19
Wld x US

20
Japan

21
UK

22
USA

23

N.America

Euro x UK

Composite

0.1444

0.2115

0.1381

0.1953

0.1649

0.1057

0.1917

0.1511

0.1211

0.1036

0.2035

0.2139

0.1615

0.1976

0.1238

0.2279

0.1506

0.0943

0.1776

0.1394

0.1079

0.1185

0.2037

0.1984

0.1629

0.0054

0.0311

0.0170

-0.0084

0.0139

0.0080

0.0236

0.0171

0.0092

0.0066

0.0189

0.0322

-0.0300

0.1145

0.0095

0.0412

0.0237

-0.0167

0.0205

0.0102

0.0320

0.0226

0.0124

0.0070

0.0290

0.0430

-0.0359

-0.0003

0.0000

0.0002

-0.0017

-0.0001

-0.0007

-0.0001

-0.0005

-0.0006

-0.0006

-0.0006

0.0000

-0.0010

0.2334

0.1562

0.2448

0.2256

0.2563

0.2228

0.2000

0.1947

0.2277

0.1690

0.2024

0.1566

0.1151

0.2349

0.1174

0.2198

0.1945

0.2288

0.3611

0.1661

0.2563

0.3345

0.3479

0.1551

0.1162

0.1140

0.2006

0.1528

0.1879

0.1970

0.2038

0.2614

0.1754

0.2152

0.2512

0.2510

0.1722

0.1529

0.1143

0.2393

0.0922

0.2071

0.1733

0.2129

0.4657

0.1450

0.3039

0.4155

0.4862

0.1260

0.0897

0.1145

0.2390

0.0875

0.2088

0.1581

0.2115

0.4809

0.1417

0.3102

0.4272

0.5034

0.1200

0.0852

0.1096

0.3553

0.1439

0.2262

0.2403

0.2355

0.2341

0.1844

0.1964

0.2312

0.2094

0.1741

0.1436

0.1562

0.1439

0.2085

0.1364

0.1962

0.1628

0.1046

0.1891

0.1492

0.1198

0.1023

0.1996

0.2105

0.1143

0.2262

0.1364

0.2612

0.1932

0.2409

0.2207

0.1822

0.1847

0.2162

0.1655

0.1528

0.1366

0.1046

0.2403

0.1962

0.1932

0.5335

0.2684

0.1800

0.2288

0.1889

0.1979

0.1521

0.2782

0.1919

0.2784

0.2355

0.1628

0.2409

0.2684

0.2608

0.2196

0.2059

0.1958

0.2262

0.1686

0.2140

0.1626

0.1399

0.2341

0.1046

0.2207

0.1800

0.2196

0.3865

0.1549

0.2649

0.3510

0.3809

0.1324

0.1031

0.1111

0.1844

0.1891

0.1822

0.2288

0.2059

0.1549

0.1969

0.1699

0.1664

0.1315

0.2064

0.1901

0.1272

0.1964

0.1492

0.1847

0.1889

0.1958

0.2649

0.1699

0.2156

0.2516

0.2590

0.1609

0.1491

0.1125

0.2312

0.1198

0.2162

0.1979

0.2262

0.3510

0.1664

0.2516

0.3261

0.3381

0.1560

0.1184

0.1153

0.2094

0.1023

0.1655

0.1521

0.1686

0.3809

0.1315

0.2590

0.3381

0.4996

0.1357

0.1005

0.1509

0.1741

0.1996

0.1528

0.2782

0.2140

0.1324

0.2064

0.1609

0.1560

0.1357

0.3259

0.2006

0.1817

0.1436

0.2105

0.1366

0.1919

0.1626

0.1031

0.1901

0.1491

0.1184

0.1005

0.2006

0.2129

0.1126

0.1562

0.1143

0.1046

0.2784

0.1399

0.1111

0.1272

0.1125

0.1153

0.1509

0.1817

0.1126

0.5288

-0.0250

-0.0530

-0.0304

0.0145

-0.0222

0.0191

-0.0396

-0.0100

0.0134

0.0017

-0.0494

-0.0565

-0.0252

24
Gold

-0.0570
-0.0659
-0.0204
-0.0258
-0.0004
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