Portfolio Portfolio Security

Portfolio WA WB Risk Return A

1 1.00 0.00 3.00% 16.00% Return 16%

2 0.90 0.10 2.76% 17.50% Risk (sd) 3%

3 0.80 0.20 2.68% 19.00% r

4 0.70 0.30 2.76% 20.50%
5 0.60 0.40 3.00% 22.00%
6 0.50 0.50 3.35% 23.50%
7 0.40 0.60 3.79% 25.00%
8 0.30 0.70 4.29% 26.50%
9 0.20 0.80 4.84% 28.00%
10 0.10 0.90 5.41% 29.50%
11 0.00 1.00 6.00% 31.00%

rf 4%

the overall risk of a portfolio is not dependent upon the risk of individual secu
assumptions
the securities are divisible
returns and risk of the securities can be ascertained
investors are rational
investors have complete information about the market
risk perception of all the individual investors are alike
covariance between the returns of the securities can be computed
there is no risk free security
 Security B

31%

6%
coeff of
correlation -0.003

on the risk of individual securities but it is dependent upon the covariance between the returns of the securities
can be computed
 The efficient frontier is a concept in modern portfolio theory
introduced by Harry Markowitz and others in 1952. It is the set of
portfolios each with the feature that no other portfolio exists with Chart Title
a higher expected
The efficient returnisbut
frontier with the
a concept in same standard
modern deviation
portfolio theory of
introduced by Harry Markowitz 35.00%
return.
and others in 1952. It is the set of
portfolios each with the feature that no other portfolio exists with
a higher expected return but with the same standard deviation of
return.
30.00%

25.00%

20.00%
Return

15.00%

10.00%

5.00%

0.00%
2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.

Risk

ent upon the covariance between the returns of the securities

 Chart Title

3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%

Risk
Loan 1000000
Period 10
Rate 12%
EMI 14,347.09

S.No. EMI Interest Payment

1 14347.09 10000.00
2 14347.09 9956.53
3 14347.09 9912.62
4 14347.09 9868.28
5 14347.09 9823.49
6 14347.09 9778.25
7 14347.09 9732.57
8 14347.09 9686.42
9 14347.09 9639.81
10 14347.09 9592.74
11 14347.09 9545.20
12 14347.09 9497.18
13 14347.09 9448.68
14 14347.09 9399.70
15 14347.09 9350.22
16 14347.09 9300.25
17 14347.09 9249.78
18 14347.09 9198.81
19 14347.09 9147.33
20 14347.09 9095.33
21 14347.09 9042.81
22 14347.09 8989.77
23 14347.09 8936.20
24 14347.09 8882.09
25 14347.09 8827.44
26 14347.09 8772.24
27 14347.09 8716.49
28 14347.09 8660.19
29 14347.09 8603.32
30 14347.09 8545.88
31 14347.09 8487.87
32 14347.09 8429.28
33 14347.09 8370.10
34 14347.09 8310.33
35 14347.09 8249.96
36 14347.09 8188.99
37 14347.09 8127.41
38 14347.09 8065.21
39 14347.09 8002.39
40 14347.09 7938.94
41 14347.09 7874.86
42 14347.09 7810.14
43 14347.09 7744.77
44 14347.09 7678.75
45 14347.09 7612.06
46 14347.09 7544.71
47 14347.09 7476.69
48 14347.09 7407.99
49 14347.09 7338.60
50 14347.09 7268.51
51 14347.09 7197.72
52 14347.09 7126.23
53 14347.09 7054.02
54 14347.09 6981.09
55 14347.09 6907.43
56 14347.09 6833.03
57 14347.09 6757.89
58 14347.09 6682.00
59 14347.09 6605.35
60 14347.09 6527.93
61 14347.09 6449.74
62 14347.09 6370.77
63 14347.09 6291.01
64 14347.09 6210.44
65 14347.09 6129.08
66 14347.09 6046.90
67 14347.09 5963.90
68 14347.09 5880.06
69 14347.09 5795.39
70 14347.09 5709.88
71 14347.09 5623.50
72 14347.09 5536.27
73 14347.09 5448.16
74 14347.09 5359.17
75 14347.09 5269.29
76 14347.09 5178.51
77 14347.09 5086.83
78 14347.09 4994.22
79 14347.09 4900.70
80 14347.09 4806.23
81 14347.09 4710.82
82 14347.09 4614.46
83 14347.09 4517.13
84 14347.09 4418.83
 85 14347.09 4319.55
86 14347.09 4219.28
87 14347.09 4118.00
88 14347.09 4015.71
89 14347.09 3912.39
90 14347.09 3808.05
91 14347.09 3702.66
92 14347.09 3596.21
93 14347.09 3488.70
94 14347.09 3380.12
95 14347.09 3270.45
96 14347.09 3159.68
97 14347.09 3047.81
98 14347.09 2934.82
99 14347.09 2820.69
100 14347.09 2705.43
101 14347.09 2589.01
102 14347.09 2471.43
103 14347.09 2352.68
104 14347.09 2232.73
105 14347.09 2111.59
106 14347.09 1989.23
107 14347.09 1865.65
108 14347.09 1740.84
109 14347.09 1614.78
110 14347.09 1487.45
111 14347.09 1358.86
112 14347.09 1228.97
113 14347.09 1097.79
114 14347.09 965.30
115 14347.09 831.48
116 14347.09 696.33
117 14347.09 559.82
118 14347.09 421.95
119 14347.09 282.69
120 14347.09 142.05
1721651.38 721651.38
 Outstanding Amount
Principal Payment 1000000
4347.09 995652.91
4390.57 991262.34
4434.47 986827.87
4478.82 982349.05
4523.60 977825.45
4568.84 973256.61
4614.53 968642.08
4660.67 963981.40
4707.28 959274.12
4754.35 954519.77
4801.90 949717.87
4849.92 944867.96
4898.42 939969.54
4947.40 935022.14
4996.87 930025.27
5046.84 924978.43
5097.31 919881.12
5148.28 914732.83
5199.77 909533.07
5251.76 904281.30
5304.28 898977.02
5357.32 893619.69
5410.90 888208.80
5465.01 882743.79
5519.66 877224.13
5574.85 871649.28
5630.60 866018.68
5686.91 860331.77
5743.78 854587.99
5801.21 848786.78
5859.23 842927.55
5917.82 837009.73
5977.00 831032.73
6036.77 824995.97
6097.14 818898.83
6158.11 812740.72
6219.69 806521.04
6281.88 800239.15
6344.70 793894.45
6408.15 787486.30
6472.23 781014.07
6536.95 774477.11
6602.32 767874.79
6668.35 761206.44
6735.03 754471.41
6802.38 747669.03
6870.40 740798.63
6939.11 733859.52
7008.50 726851.02
7078.58 719772.43
7149.37 712623.06
7220.86 705402.20
7293.07 698109.13
7366.00 690743.12
7439.66 683303.46
7514.06 675789.40
7589.20 668200.20
7665.09 660535.10
7741.74 652793.36
7819.16 644974.20
7897.35 637076.85
7976.33 629100.52
8056.09 621044.43
8136.65 612907.78
8218.02 604689.76
8300.20 596389.57
8383.20 588006.37
8467.03 579539.34
8551.70 570987.63
8637.22 562350.42
8723.59 553626.82
8810.83 544816.00
8898.93 535917.06
8987.92 526929.14
9077.80 517851.34
9168.58 508682.75
9260.27 499422.49
9352.87 490069.62
9446.40 480623.22
9540.86 471082.36
9636.27 461446.08
9732.63 451713.45
9829.96 441883.49
9928.26 431955.23
 10027.54 421927.69
10127.82 411799.87
10229.10 401570.77
10331.39 391239.39
10434.70 380804.69
10539.05 370265.64
10644.44 359621.20
10750.88 348870.32
10858.39 338011.92
10966.98 327044.95
11076.65 315968.30
11187.41 304780.89
11299.29 293481.61
11412.28 282069.33
11526.40 270542.93
11641.67 258901.26
11758.08 247143.18
11875.66 235267.51
11994.42 223273.09
12114.36 211158.73
12235.51 198923.22
12357.86 186565.36
12481.44 174083.92
12606.26 161477.66
12732.32 148745.35
12859.64 135885.70
12988.24 122897.47
13118.12 109779.35
13249.30 96530.05
13381.79 83148.25
13515.61 69632.64
13650.77 55981.87
13787.28 42194.59
13925.15 28269.44
14064.40 14205.04
14205.04 0.00
1000000.00
Portfolio WA WB Portfolio Risk
1 1.00 0.00 3.00%
2 0.90 0.10 2.77%
3 0.80 0.20 2.68%
4 0.70 0.30 2.77%
5 0.60 0.40 3.00%
6 0.50 0.50 3.35%
7 0.40 0.60 3.79%
8 0.30 0.70 4.30%
9 0.20 0.80 4.84%
10 0.10 0.90 5.41%
11 0.00 1.00 6.00%
12 -0.10 1.10 6.61%
13 0.60 0.40 3.00%

Rf 7%
NEW PF RISK = WEIGHT OF THE RISKY ASSET * STD DEV OF THE RISKY ASS

SBI SHARE WEIGHT

0.8
STD DEV
0.4
NEW PF STD DEV
0.32

Risky PF ( A and B)
WA
WB

Risk free security (Rf)

Rf

New pf having A, B and risk free security

the proportion of A and B shall always be the

proportion for which sharpe ratio is highest
 Portfolio Return Security A Security B Sharpe Ratio
16.00% Return 16% 31% 3.000
17.50% Risk 3% 6% 3.796
19.00% r coeff of correlation 0 4.472
20.50% 4.881
22.00% 5.000
23.50% =(E2-$C$15)/D2 4.919
25.00% 4.743
26.50% 4.540
28.00% 4.341
29.50% 4.160
31.00% 4.000
32.50% 3.860
22.00% 1.00 5.000

KY ASSET * STD DEV OF THE RISKY ASSET

THE COMBINATION OF RISKY ASSETS WHERE SHARPE RATIO IS MAX
WILL GIVE YOU THE OPTIMAL COMBINATION OF TWO RISKY ASSETS
THIS PORTFOLIO IS CALLED OPTIMUM PORTFOLIO
PF Risk PF Return
0% 7%
3.00% 22.00%
5% 31.8300%
7% 41.7620%

0.6
0.4 In the presence of risk free security

Risk of a risky security with risk free security only depends on the weight and risk of risky secu
7%

Wrf W(A+B) WA

0.2 0.8 0.48

 45.00%

40.00%

35.00%
31.83% PF1
PF11
30.00% PF10
PF9
PF8
25.00% PF7
PF6
PF5
22.00%
20.00% PF4
PF3
PF2
15.00% PF1

10.00%
7.00%
5.00%

0.00%
SHARPE RATIO IS MAX 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00
N OF TWO RISKY ASSETS

UTILITY = ER - 0.5*A*VAR
Utility A Var Risk Return
20 5 1% 1% 20.025
20 5 4% 2% 20.1
20 5 9% 3% 20.225
20 5 16% 4% 20.4
20 5 25% 5% 20.625

on the weight and risk of risky security

WB

0.32
 41.76%

31.83% PF12
PF11
PF10
PF9

5.00% 6.00% 7.00% 8.00%