The purpose of this workbook is to demonstrate the effect of correlation on the efficient

frontier. That is, it allows you to change the correlation coefficient and see how the
risk/return tradeoff changes.

There the "Data" worksheet shows the numbers that make up the data used in the
"Efficient Frontier" chart. You can change the correlation on either the worksheet or from
the chart. Each has a "spinner" control that is used to change the correlation in 10%
increments. Both spinners are linked to the same cell on the worksheet, so changing it in
the chart changes it in the worksheet, and vice versa. The chart shows two colored
points that represent a 100% investment in Stock A and B. The line in between shows
the infinite number of possible combinations of these two investments.

The worksheet is protected to prevent accidental changes. It is not password protected,

so you can unprotect the worksheet through Tools --> Unprotect Worksheet.

Timothy R. Mayes, Ph.D.

Associate Professor of Finance
Metropolitan State College of Denver
mayest@mscd.edu
 Stock A Stock B
Exp Ret 10% 15%
Std Dev. 13% 17%

Correlation 100%

Weights Portfolio Statistics

Stock A Stock B Std Dev Exp Return
0.00% 100.00% 17.00% 15.00%
5.00% 95.00% 16.80% 14.75%
10.00% 90.00% 16.60% 14.50%
15.00% 85.00% 16.40% 14.25%
20.00% 80.00% 16.20% 14.00%
25.00% 75.00% 16.00% 13.75%
30.00% 70.00% 15.80% 13.50%
35.00% 65.00% 15.60% 13.25%
40.00% 60.00% 15.40% 13.00%
45.00% 55.00% 15.20% 12.75%
50.00% 50.00% 15.00% 12.50%
55.00% 45.00% 14.80% 12.25%
60.00% 40.00% 14.60% 12.00%
65.00% 35.00% 14.40% 11.75%
70.00% 30.00% 14.20% 11.50%
75.00% 25.00% 14.00% 11.25%
80.00% 20.00% 13.80% 11.00%
85.00% 15.00% 13.60% 10.75%
90.00% 10.00% 13.40% 10.50%
95.00% 5.00% 13.20% 10.25%
100.00% 0.00% 13.00% 10.00%
 200
Efficient Frontier Correla
Efficient Frontier Correlation = 100%
 Efficient Frontier
Correlation = 100%
16.00% 100% in Stock
B

14.00%

12.00%

10.00%
100% in Stock
A
Return

8.00%

6.00%

4.00%

2.00%

0.00%
12.50% 13.00% 13.50% 14.00% 14.50% 15.00% 15.50% 16.00% 16.50% 17.00% 17.50%

Standard Deviation