y=x2

4.5

3.5

2.5

1.5

0.5

-2.5

-2

-1.5

-1

-0.5

0
x

0.5

1.5

2.5

y = x2 + z 2

5
y 4

2
1.75
1

0.25
-0.5

0.5

1.5

-1.25
0

-0.5

-1

-1.5

-2

-2

x
-2
-1.9
-1.8
-1.7
-1.6
-1.5
-1.4
-1.3
-1.2
-1.1
-1
-0.9
-0.8
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2

f(x) = x^2
4
3.61
3.24
2.89
2.56
2.25
1.96
1.69
1.44
1.21
1
0.81
0.64
0.49
0.36
0.25
0.16
0.09
0.04
0.01
0
0.01
0.04
0.09
0.16
0.25
0.36
0.49
0.64
0.81
1
1.21
1.44
1.69
1.96
2.25
2.56
2.89
3.24
3.61
4

-2
-1.75
-1.5
-1.25
-1
-0.75
-0.5
-0.25
0
0.25
0.5
0.75
1
1.25
1.5
1.75
2

-2
8
7.0625
6.25
5.5625
5
4.5625
4.25
4.0625
4
4.0625
4.25
4.5625
5
5.5625
6.25
7.0625
8

-1.75
7.0625
6.125
5.3125
4.625
4.0625
3.625
3.3125
3.125
3.0625
3.125
3.3125
3.625
4.0625
4.625
5.3125
6.125
7.0625

-1.5
6.25
5.3125
4.5
3.8125
3.25
2.8125
2.5
2.3125
2.25
2.3125
2.5
2.8125
3.25
3.8125
4.5
5.3125
6.25

-1.25
5.5625
4.625
3.8125
3.125
2.5625
2.125
1.8125
1.625
1.5625
1.625
1.8125
2.125
2.5625
3.125
3.8125
4.625
5.5625

Using the solver to find minimize y = f(x,z) = x^2 + z^2

x
0

z
0

f(x,z)
0

Using the solver to find minimize y = f(x,z) = x^2 + z^2

subject to x+z = 1
constraint
x
z
x+z
f(x,z)
0.000
0.000
0.000
0.000

z
-1
5
4.0625
3.25
2.5625
2
1.5625
1.25
1.0625
1
1.0625
1.25
1.5625
2
2.5625
3.25
4.0625
5

-0.75
4.5625
3.625
2.8125
2.125
1.5625
1.125
0.8125
0.625
0.5625
0.625
0.8125
1.125
1.5625
2.125
2.8125
3.625
4.5625

mize y = f(x,z) = x^2 + z^2

mize y = f(x,z) = x^2 + z^2

-0.5
4.25
3.3125
2.5
1.8125
1.25
0.8125
0.5
0.3125
0.25
0.3125
0.5
0.8125
1.25
1.8125
2.5
3.3125
4.25

-0.25
4.0625
3.125
2.3125
1.625
1.0625
0.625
0.3125
0.125
0.0625
0.125
0.3125
0.625
1.0625
1.625
2.3125
3.125
4.0625

0
4
3.0625
2.25
1.5625
1
0.5625
0.25
0.0625
0
0.0625
0.25
0.5625
1
1.5625
2.25
3.0625
4

0.25
4.0625
3.125
2.3125
1.625
1.0625
0.625
0.3125
0.125
0.0625
0.125
0.3125
0.625
1.0625
1.625
2.3125
3.125
4.0625

0.5
4.25
3.3125
2.5
1.8125
1.25
0.8125
0.5
0.3125
0.25
0.3125
0.5
0.8125
1.25
1.8125
2.5
3.3125
4.25

0.75
4.5625
3.625
2.8125
2.125
1.5625
1.125
0.8125
0.625
0.5625
0.625
0.8125
1.125
1.5625
2.125
2.8125
3.625
4.5625

1
5
4.0625
3.25
2.5625
2
1.5625
1.25
1.0625
1
1.0625
1.25
1.5625
2
2.5625
3.25
4.0625
5

1.25
5.5625
4.625
3.8125
3.125
2.5625
2.125
1.8125
1.625
1.5625
1.625
1.8125
2.125
2.5625
3.125
3.8125
4.625
5.5625

1.5
6.25
5.3125
4.5
3.8125
3.25
2.8125
2.5
2.3125
2.25
2.3125
2.5
2.8125
3.25
3.8125
4.5
5.3125
6.25

1.75
7.0625
6.125
5.3125
4.625
4.0625
3.625
3.3125
3.125
3.0625
3.125
3.3125
3.625
4.0625
4.625
5.3125
6.125
7.0625

2
8
7.0625
6.25
5.5625
5
4.5625
4.25
4.0625
4
4.0625
4.25
4.5625
5
5.5625
6.25
7.0625
8

A'

1
4

2
5

1
3

2
4

5
7

6
8

3
6

1
2
3
B+C

6
10

8
12

2
6

4
8

2*B

4
5
6

Investment Possibilities Set

0.250

0.200
Asset A
0.150

Portfolio ER

Frontier
Asset B

50% A + 50% B
0.100

Asset A
50-50 port

Global minimum
variance portfolio

Global min

Asset B
0.050

0.000
0.000

0.050

0.100

0.150

0.200

0.250

-0.050
Portfolio SD

0.300

0.350

0.400

0.450

E[R]
var(R)
SD(R)

asset a
asset b tangency
t-bills
17.50% 5.50%
10.99%
6.70% 1.30%
1.54%
25.88% 11.40%
12.42%

3.00%

Efficient portfolio with same SD (risk) as asset B

weight in
weight
tangency
in T-bills
xt
1-xt
91.80% 8.20%
E[R]
10.33%
var(R)
1.30%
SD(R)
11.40%

Efficient portfolio with same ER a

weight in weight
tangency in T-bills
xt
1-xt
31.30% 68.70%
5.50%
0.15%
3.89%

Value at Risk calculations

Distribution of RB
mB
sB
q(0.05) exp(q(0.05))-1
W0
6%
11% -13.25%
-12.41% $

VaR
100,000 $ 12,413

Distribution of RB
mp
sP
q(0.05) exp(q(0.05))-1
W0
5.50%
3.89% -0.89%
-0.89% $

VaR
100,000 $
889

portfolio with same ER as asset B

Efficient Portfolios
0.250

Efficient portfolios of T-bills

and assets A and B

0.200

Asset A

Portfolio ER

0.150

Tangency

0.103
0.100
Combinations of tangency portfolio
and T-bills that has the same SD as
asset B
0.055
0.050
rf

0.000
0.000

Asset B
Combinations of tangency
portfolio and T-bills that has
same ER as asset B
0.039
0.050

0.100 0.114

0.150

0.200
Portfolio SD

0.250

0.300

0.350

Portfolio Frontier
0.250

0.200

Portfolio ER

0.150

0.100

0.050

0.000
0.000

0.050

0.100

0.150

0.200

0.250

-0.050
Portfolio SD

0.300

0.350

0.400

0.450

Risky assets plus T-bills

0.350

0.300

0.250

Portfolio ER

0.200

B + T-bills
Asset B
A + T-bills

0.150

A+B
50-50
50-50+T-bill

0.100

0.050

0.000
0.000

100% in Asset B

0.100

0.200

0.300

-0.050
Portfolio SD

0.400

0.500

0.600

Stock A Stock B T-bills

E[R]
0.175
0.055
0.03
VAR(R)
0.067
0.013
0
Sharpe's slope
SD(R)
0.259
0.114
0 asset a
0.560
COV
-0.005
0 asset b
0.219
CORR
-0.165
0
Portfolios of 2 risky assets
Portfolios of asset B and T-bills
xa
xb
E[Rp]
Var(Rp) SD(Rp)
xb
E[Rp]
-0.5
1.5
-0.005
0.053
0.231
0
0.030
-0.4
1.4
0.007
0.042
0.204
0.1
0.033
-0.3
1.3
0.019
0.032
0.178
0.2
0.035
-0.2
1.2
0.031
0.024
0.154
0.3
0.038
-0.1
1.1
0.043
0.017
0.132
0.4
0.040
0
1
0.055
0.013
0.114
0.5
0.043
0.1
0.9
0.067
0.010
0.102
0.6
0.045
0.2
0.8
0.079
0.009
0.097
0.7
0.048
0.3
0.7
0.091
0.010
0.102
0.8
0.050
0.4
0.6
0.103
0.013
0.114
0.9
0.053
0.5
0.5
0.115
0.018
0.133
1
0.055
0.6
0.4
0.127
0.024
0.154
1.1
0.058
0.7
0.3
0.139
0.032
0.179
1.2
0.060
0.8
0.2
0.151
0.042
0.205
1.3
0.063
0.9
0.1
0.163
0.054
0.231
1.4
0.065
1
0
0.175
0.067
0.259
1.5
0.068
1.1
-0.1
0.187
0.082
0.287
1.6
0.070
1.2
-0.2
0.199
0.099
0.315
1.7
0.073
1.3
-0.3
0.211
0.118
0.344
1.8
0.075
1.4
-0.4
0.223
0.139
0.373
1.9
0.078
1.5
-0.5
0.235
0.161
0.402
2
0.080
Find Global Minimum Variance Portfolio
Analytic Solution
Solver
xa_min xb_min
xa_min xb_min constraint var(Rp)

E[Rgmin]
var(Rgmin)
SD(Rgmin)

0.199
0.079
0.009
0.097

0.801

0.199

Weights in Global Min Portfolio

0.801

1.000

0.009

20%
80%

xa_min
xb_min

f asset B and T-bills

SD(Rp)
0.000
0.011
0.023
0.034
0.046
0.057
0.068
0.080
0.091
0.103
0.114
0.125
0.137
0.148
0.160
0.171
0.182
0.194
0.205
0.217
0.228

Portfolios of asset A and T-bills

xa
E[Rp]
SD(Rp)
0
0.030
0.000
0.1
0.045
0.026
0.2
0.059
0.052
0.3
0.074
0.078
0.4
0.088
0.104
0.5
0.103
0.129
0.6
0.117
0.155
0.7
0.132
0.181
0.8
0.146
0.207
0.9
0.161
0.233
1
0.175
0.259
1.1
0.190
0.285
1.2
0.204
0.311
1.3
0.219
0.336
1.4
0.233
0.362
1.5
0.248
0.388
1.6
0.262
0.414
1.7
0.277
0.440
1.8
0.291
0.466
1.9
0.306
0.492
2
0.320
0.518

x55
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2

E[Rp]
SD(Rp)
0.030
0.000
0.039
0.013
0.047
0.027
0.056
0.040
0.064
0.053
0.073
0.066
0.081
0.080
0.090
0.093
0.098
0.106
0.107
0.119
0.115
0.133
0.124
0.146
0.132
0.159
0.141
0.172
0.149
0.186
0.158
0.199
0.166
0.212
0.175
0.225
0.183
0.239
0.192
0.252
0.200
0.265

Find Tangency Portfolio

Analytic solution

constraint value
1
E[Rtan]
var(Rtan)
SD(Rtan)

Er
var
sd

xa_tan xb_tan
0.46
0.54
0.110
0.015
0.124

Weights in Tangency Portfolio

54%

46%

xa_tan
xb_tan

Portfolio
0.300
0.250

Portfolio ER

Portfolios of tangency and T-bills

xt
E[Rp]
SD(Rp)
0
0.030
0.000
0.1
0.038
0.012
0.2
0.046
0.025
0.3
0.054
0.037
0.4
0.062
0.050
0.5
0.070
0.062
0.6
0.078
0.075
0.7
0.086
0.087
0.8
0.094
0.099
0.9
0.102
0.112
1
0.110
0.124
1.1
0.118
0.137
1.2
0.126
0.149
1.3
0.134
0.161
1.4
0.142
0.174
1.5
0.150
0.186
1.6
0.158
0.199
1.7
0.166
0.211
1.8
0.174
0.224
1.9
0.182
0.236
2
0.190
0.248

0.200
0.150
0.100
0.050
0.000
0.000
-0.050

0.100

solver solution
Sharpe's
xa_tan xb_tan E[Rtan] var(Rtan) constraint slope
constraint value
0.46
0.54
0.11
0.02
1.00
0.64
1

0.200

Portfolio S

Portfolio Frontier

A&B
Asset A
Asset B
Global Min
B + T-bills
A + T-bills
Tangency

0.200

0.300

Portfolio SD

0.400

0.500