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UVA-F-1341
This document is authorized for use only by shuang lin at UMD.
Please do not copy or redistribute. Contact permissions@dardenbusinesspublishing.com for questions or additional permissions.
MARKOV’S TRILEMMA
George Markov eagerly awaited his first day at his new job with Athena Asset
Management in a major metropolitan area in the northeastern United States. His future boss had given him a list of questions that would prepare him well for the job. According to the boss:
If you can master these questions, you’ll be well on your way to becoming a portfolio manager! Before attempting those questions, be sure to read carefully
Chapter 8 of Bodie, Kane, and Marcus’s Investments book. Also, I have included an Excel spreadsheet (Exhibit 1), which contains data on several stocks,1 including returns, standard deviations and correlations, and a simple three asset optimizer model, which makes use of the Microsoft Excel Solver Add-In, along with some simple instructions.
Markov’s starting date of September 1 was approaching fast; it was, in fact, only a week away. He was determined to finish the practice questions that day.
1. Go to the worksheet “Three Asset Optimizer” in Exhibit 2. Note that the stocks are arbitrarily weighted so that they each make up about 1/3 of the portfolio. Tools Solver will allow you to solve for the weightings that maximize your Sharpe ratio and therefore represent your optimal portfolio for your risky assets. Go to Tools Solver. Most of the following parameters should be saved in the wizard box that pops up:
Your target cell is the Sharpe ratio formula;
You are trying to maximize it;
By changing the three cells that contain your weightings;
With the constraint that the sum of your weightings equals 1.
1
Specifically, the stocks that are included in the spreadsheet are GM, GE, MRK (Merck), AA (Alcoa), IP
(International Paper), IBM, and AOL.
UVA-F-1341
This document is authorized for use only by shuang lin at UMD.
Please do not copy or redistribute. Contact permissions@dardenbusinesspublishing.com for questions or additional permissions.
MARKOV’S TRILEMMA
George Markov eagerly awaited his first day at his new job with Athena Asset
Management in a major metropolitan area in the northeastern United States. His future boss had given him a list of questions that would prepare him well for the job. According to the boss:
If you can master these questions, you’ll be well on your way to becoming a portfolio manager! Before attempting those questions, be sure to read carefully
Chapter 8 of Bodie, Kane, and Marcus’s Investments book. Also, I have included an Excel spreadsheet (Exhibit 1), which contains data on several stocks,1 including returns, standard deviations and correlations, and a simple three asset optimizer model, which makes use of the Microsoft Excel Solver Add-In, along with some simple instructions.
Markov’s starting date of September 1 was approaching fast; it was, in fact, only a week away. He was determined to finish the practice questions that day.
1. Go to the worksheet “Three Asset Optimizer” in Exhibit 2. Note that the stocks are arbitrarily weighted so that they each make up about 1/3 of the portfolio. Tools Solver will allow you to solve for the weightings that maximize your Sharpe ratio and therefore represent your optimal portfolio for your risky assets. Go to Tools Solver. Most of the following parameters should be saved in the wizard box that pops up:
Your target cell is the Sharpe ratio formula;
You are trying to maximize it;
By changing the three cells that contain your weightings;
With the constraint that the sum of your weightings equals 1.
1
Specifically, the stocks that are included in the spreadsheet are GM, GE, MRK (Merck), AA (Alcoa), IP
(International Paper), IBM, and AOL.