Sheet1

Spreadsheet illustrating the use of the "solver" to compute the global minimum variance portfolio
and the tangency portfolio for the Three-firm example
Three-firm example data
Riskfree Rate
Stock
E[R]
VAR(R) COV(I,J)
PAIR(I,J)
Rf
1
0.229
0.924
0.063
(1,2)
0.12
2
0.138
0.862
-0.582
(1,3)
3
0.052
0.528
-0.359
(2,3)
Computing the global minimum variance portfolio using the "solver"
Problem: minimize VAR(Rp) subject to x1+x2+x3 = 1, xi = share of wealth invested in stock I
Portfolio weights
function to be minimized
x1
x2
x3
Constraint VAR(Rp)
0.200
0.300
0.500
1.000
0.030
Computing the tangency portfolio using the "solver"
Problem: maximize (E[Rp]-rf)/SD(Rp) subject to x1+x2+x3=1
Portfolio weights
function to be maximized
x1
x2
x3
Constraint E[Rp]
VAR(Rp) SD(Rp)
SLOPE(Rp)
0.300
0.200
0.500
1.000
0.122
0.011
0.104
0.022
Computing an efficient portfolio using the "solver"
Problem: minimize var(Rp) subject to x1+x2+x3=1 and E[Rp]=mu0
target
Portfolio weights
function to be minimized
mu0
x1
x2
x3
Constraint 1 Constraint 2 Var(Rp)
0.01
0.3
0.3
0.4
1
0.1309
0.128

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function to be maximized
SLOPE(Rp)

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