Portfolio Optimization - Dynamic Chart Page 1 of 3

PORTFOLIO OPTIMIZATION - Dynamic Chart

If you increased the expected return of a risky asset, what would happen to the efficient frontier curve or the
efficient trade-off line (tangent line)? What would happen if you increased the standard deviation of a risky asset?
What would happen if you increased the correlation between risky assets? You can answer these questions and
more by creating an Dynamic Chart using “spinners.” Spinners are up-arrow / down-arrow buttons that allow you
to easily change the inputs to the model with the click of a mouse. Then the spreadsheet recalculates the model
and instantly redraws the model outputs on the graph.

FIGURE 1. Spreadsheet for Portfolio Optimization - Dynamic Chart.

How To Build This Spreadsheet Model.

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1. Start with the Many Assets Spreadsheet, Add Rows, and Rearrange A Bit. Open the spreadsheet that you
created for Portfolio Optimization - Many Assets and immediately save the spreadsheet under a new name
using the File Save As command. Move both of the graphs out of the way. Select each graph and drag them
below row 22 and to the right of column H. Add four rows by selecting the range A19:A22, clicking on
Insert, Rows. Select the range E2:F10 and drag the range (hover the cursor over the lower highlighted line,
click on the left mouse button, and hold it down while you move it) to cell H26. Select the range D5:D10 and
drag the range to cell F5.

2. Increase Row Height for the Spinners. Select the range A5:A10. Then click on Format Row Height
from the main menu. Enter a height of 30 and click on OK. Select the range A19:A22. Then click on
Format Row Height from the main menu. Enter a height of 30 and click on OK.

3. Display the Forms Toolbar. Select View Toolbars Forms from the main menu.

4. Create the Spinners. Look for the up-arrow / down-arrow button on the Forms toolbar (which will display
the word “Spinner” if you hover the cursor over it) and click on it. Then draw the box for a spinner from the
upper left corner of cell D5 down to the lower right corner of the cell. Then a spinner appears in the cell D5.
Right click on the spinner (press the right mouse button while the cursor is above the spinner) and a small
menu pops up. Click on Copy. Then select the cell D6 and click on Paste. This creates an identical spinner
in the cell D6. Repeat the process four times more in cells D7, D8, D9, and D10. Repeat the process five
times more in cells G6, G7, G8, G9, and G10. Click on the spinner button on the Forms toolbar and draw the
box for a spinner covering the left half of cell B19. Click on Copy. Then select the cell B20 and click on
Paste. Repeat the process eight times more in cells B21, B22, C20, C21, C22, D21, D22, and E22.

5. Create The Cell Links. Right click on the first spinner in the cell D5 and a small menu pops up. Click on
Format Control and a dialog box pops up. Click on the Control tab, then enter the cell link E5 in the Cell
link edit box and click on OK. Repeat this procedure for the spinners in the range D6:D10 and in the range
G6:G10 to link each one to the cell immediately to the right of each spinner. Right click on the spinner in the
cell B19 and a small menu pops up. Click on Format Control and a dialog box pops up. Click on the
Control tab, then enter the same cell B19 as the cell link in the Cell link edit box and click on OK. Repeat
this same cell procedure for the spinners in the range B20:B22 and in the triangle C20 to C22 to E22 (linking
each one to the same cell as the spinner). Test your spinners by clicking on the up-arrows and down-arrows of
the spinners to see how they change the values in the linked cells.

6. Create Scaled Inputs. The values in the linked cells are always integers, but they can be scaled appropriately
to the problem at hand. In cell C5, enter =E5/500 and copy this cell to the range C6:C10 and to the range
F6:F10. In cell B15, enter =B19/10-1 and copy the cell to the range B20:B22 and to the triangle C20 to C22
to E22.

7. Relocate The Graphs. Move both of the graphs back into place. Move the Efficient Frontier graph into the
range G11:K22. Move the Portfolio Weights graph into the range I5:K10.

Your Dynamic Chart allows you to change Portfolio Optimization inputs and instantly see the impact on a graphs
of the efficient frontier and portfolio weights. This allows you to perform instant experiments on the efficient
frontier and portfolio weights. The portfolio weights of the optimal (tangent) portfolio are a trade-off between
putting more in assets with higher expected returns vs. spreading investment out evenly to lower portfolio risk by
diversification. You can see how this trade-off works by doing some of the experiments listed below:

• What happens to the optimal portfolio weight of an individual asset that is underpriced (e.g., the
expected return is raised)?
• What happens to the optimal portfolio weight of an individual asset that is overpriced (e.g., the
expected return is lowered)?
• What happens to the optimal portfolio weight of an individual asset that is mispriced due to the
standard deviation of the asset being raised?

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• What happens to the optimal portfolio weight of an individual asset that is mispriced due to the
standard deviation of the asset being lowered?
• What happens to the optimal portfolio weights of two risky assets when the correlation between them
is raised?
• What happens to the optimal portfolio weights of two risky assets when the correlation between them
is lowered?
• What happens to the efficient trade-off (tangent) line when the riskfree rate is raised?
• What happens to the efficient trade-off (tangent) line when the riskfree rate is lowered?

http://www.excelmodeling.com/Portfolio%20Optimization%20-%20Dynamic%20Chart.htm 8/22/2007