Perlman & Brothers Portfolio Selection Model

Stock input data

Stock 1 Stock 2 Stock 3
Mean Return 0.14 0.11 0.1
Stdev return 0.2 0.15 0.08 =HLOOKUP($G9;$B$4:$D$6;3)*B9*HLOOKU

Correlations Stock 1 Stock 2 Stock 3 Covariances Stock 1

Stock 1 1 0.6 0.4 Stock 1 0.04
Stock 2 0.6 1 0.7 Stock 2 0.018
Stock 3 0.4 0.7 1 Stock 3 0.0064

Investment decisions
Stock 1 Stock 2 Stock 3 Total Required
SUM(B15:D15)
Fractions to invest 50% 0% 50% 1 = 1

Portfolio Return SUMPRODUCT(B5:D5;B15:D15)

Actual Required
0.12 >= 0.12

MMULT(B15:D15;MMULT(H9:J11;TRANSPOSE(B15:D15)))
Portfolio Variance 0.0148
Portfolio Stdev 12.17%
SQRT(B21)
$G9;$B$4:$D$6;3)*B9*HLOOKUP(H$8;$B$4:$D$6;3)

Stock 2 Stock 3
0.018 0.0064
0.0225 0.0084
0.0084 0.0064

SUM(B15:D15)

J11;TRANSPOSE(B15:D15)))
Sensitivity Analysis

Expected Return Stock 1 Stock 2 Stock 3 Stdev of Return Expected Return

10.0% 0% 0% 100% 8.0% 10.0%
10.5% 10% 0% 88% 8.3% 10.5% 16.0%
11.0% 30% 0% 75% 9.2% 11.0% 14.0%
11.5% 40% 0% 63% 10.5% 11.5% 12.0%

Expected Return
12.0% 50% 0% 50% 12.2% 12.0% 10.0%
12.5% 60% 0% 38% 14.0% 12.5% 8.0%
13.0% 70% 0% 25% 15.9% 13.0% 6.0%
13.5% 90% 0% 13% 17.9% 13.5% 4.0%
14.0% 100% 0% 0% 20.0% 14.0%
2.0%
0.0%
6.0% 8.0%
 Risk vs. Return
16.0%
14.0%
12.0%
Expected Return

10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% 22.0%

Stdev of Return