The Markowitz Mean Variance Optimization Model Finance Essay

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Abstract
This project examined the optimal allocation of stocks based on the Markowitz Mean
Variance Optimization Model. It is mainly based on the comparison between two
samples of stock returns. The first sample is referred to as the full data set, and
contains the returns of the stocks GE, Baxter, Dow, Caterpillar, Apple, and Procter
and Gamble calculated over the period of five years. The second sample takes the 250
most recent daily returns as the base data set. The objective is to find the optimal
allocation in a portfolio of risky assets only and the Complete Portfolio that an
investor could choose in order to maximize his utility. Before analyzing the results
from the optimization process, we started by analyzing the data, and verifying that
the assumption of normality the model is valid in both data sets. Then we describe
the results given by the different optimizations that we calculated and we compared
both samples showing the optimal allocation for risky assets only and the optimal
allocation that includes the risk free asset. Then, we graph the efficient frontier along
with the capital allocation line, and we make some comments about the results
obtained. Finally, we formulate the recommendation to the investor based on the
results obtained, and we point out some of the limitations of the model that could
explain some of the unrealistic results that we found. The methodology of the
calculations, the tables and the charts used are all referenced in the appendix of this
paper in order to illustrate the results obtained.

Introduction
This project is based on the Markowitz Mean Variance Optimization Model for
defining the optimal weights of assets in a given portfolio based on various
investment constraints. The model generally seeks to maximize return for a given
level of risk, or minimize risk for a given level of return. Markowitz formulated the
portfolio construction problem as a utility maximization problem and used this to
develop a framework for selecting a range of optimal portfolios. In his model,
Markowitz made several assumptions on which this project is based. These

assumptions designed the portfolio selection problem to a mean-variance portfolio

optimization problem and are as follows:
All investors have a single holding period during which they will maximize their
utility function.
Investors don't incur any transaction costs or taxes while trading the securities.
Investors have a quadratic utility function that they should maximize based on the
expected return, variance, and risk aversion.
The returns used should be normally distributed.
Investors are assumed to be risk averse where they prefer to maximize the returns
given a minimum level of risk
All the investors share the same economic view of the world, and they analyze the
securities in the same way.

I/ Analyzing Stock Returns and Standard

Deviations
According to Table 1 and 2 in Appendix 2, the results show that the expected returns
in the full data set obtained were generally lower than the expected returns in the
sample of the 250 most recent returns. (Please refer to Appendix 1 for the
methodology of calculations.) The major explanation is that the full data set covers
the 2007/08 financial crisis in which the U.S stock market has dropped down by
more than 50%, which had an implication on the mean expected returns calculated
over the period from 2006 until 2011, and shows relatively lower returns. In
comparison, the 250 most recent returns sample covers a period of one year starting
from the 2nd of March, 2010 until the 31st of January, 2011. During this period, the
stock market has recovered from the historic lows of March 2009, and is still facing a
market rally that has been consistent until now, which affects the performance of
individual stocks at the exception of Baxter, and Procter & Gamble, which
underperformed due to some fundamental issues that are related to their business
sectors.
Regarding standard deviation, we can see that the stocks in the full data set present a
higher standard deviation than in the second data set. This shows that during the
period from 2006 to 2011, there has been a high volatility in the market, which is

illustrated by the stocks demonstrating some extreme returns. This is mainly due the
shape of the recovery after the financial crisis, which displayed some significant
drops in the share prices and recovering back at a rapid rate of growth, after March
2009. However, the volatility has stabilized during the last year which means that
stocks are becoming less risky in comparison with the last three years.

II/ Analyzing the Data Sets

1) Testing for normality
Before going through the process of selecting the optimal portfolios, we first examine
the returns computed and see if they match the assumptions of normality that have
been stated earlier for the model to be valid. In order to do so, the Jarque-Bera test
for normality is chosen, and provides a formal method in which Skewness and
Kurtosis are used to analyze the distribution of the returns. (Please refer to the
appendix for the description of the Jarque and Bera test for normality)

Analysis of the results:

The data in tables 3 and 4 from Appendix 2 show different results for the two sample
sizes. In the Full data set, the JB test statistics computed are all higher than the 9.21
critical value with 99% confidence level, which means that the distribution of the
returns is not normal as we reject the null hypothesis. This is mainly explained by the
fact that the kurtosis observed in all the stocks' returns is positive and is higher than
3, which shows that the distributions exhibit fat tails. Moreover, Skewness is
different from zero for all the distributions showing that they are not perfectly
symmetrical, which rejects another condition for the normality of returns. If the
returns display positive Skewness, this means that there is a high probability that the
stocks involved will show positive returns in the future. By comparison in the second
data set, we notice that the distributions of returns of the Stocks GE, Baxter, Procter
& Gamble, and Apple can all be assumed normal, as the JB statistic is lower than
9.21. One similarity between the stocks that don't have a normal distribution of
returns in both data sets is that they display a leptokurtic distribution which means
that the distribution is more focused around the center and in the tails than the
normal distribution, and this is due to the excess kurtosis.

2) Testing for evidence of Volatility Clustering

Volatility clustering is mainly characterized by the historical data of stock returns

showing periods of high volatilities giving some extreme returns, which are then
followed by periods of relatively low volatilities.

Analysis of the results:

According to the volatility charts in Appendix 2, we notice that all the stocks in the
complete data set showed evidence of volatility clustering with a certain similarity in
the clusters observed. In fact, most of the volatility clusters observed can be located
between the periods of late 2007 to the mid 2009. This is explained by the high
volatility of returns during the period of the financial crisis, where most stocks
showed some extreme variations in the returns due to the investors trying to digest
the panic that was going on in the market, and then they reacted accordingly by
liquidating their positions. This pattern lasted until the mid of 2009 until some of the
confidence was restored and investors came back into the market again. In
comparison with the sample of the 250 most recent returns and according to the
graphs, we cannot detect any significant evidence of volatility clustering for the
stocks of Caterpillar and DOW, but we can clearly observe some evidence regarding
Apple, P&G, GE, and Baxter as the cluster can be clearly identifiable. This is mainly
interpreted by the fact that since the information arrives in cluster, investors tend to
take more or less time to react relative to the kinds of information that they receive
with respect to the stocks.

III/ The Portfolio Selection Process

The Main objective of the portfolio optimization process is to find the optimal
allocation of assets in the two data sets given two kinds of portfolios: one containing
risky assets only, and another one that would include a risk free asset. For this, we
used the Excel Solver to run three types of optimizations that result in three types of
portfolios: the Minimum Variance Portfolio, the Optimal Risky Portfolio, and the
Optimal Complete Portfolio.

1) Analyzing the results given by the Minimum

Variance Portfolios
In the Markowitz model, we have assumed that investors seek to maximize the return
at a given level of risk, or minimize the risk at a given level of return. The minimum
variance portfolio is the one that gives the optimal allocation of risky assets by
minimizing the general risk of the portfolio. In order to do so, we used the Excel

Solver and we set the portfolio variance as the target to minimize given both the
constrained and unconstrained optimization criteria. The formula for the portfolio
variance is given in the Appendix and is derived from the correlation matrixes that
were computed for both data sets. The general parameters used in the Excel Solver
are also explained for both the constrained and the unconstrained portfolios.

Analysis of the results:

According to table 5 and 6 in Appendix 2, the minimum variance portfolio for the full
data gives two results based on the constrained optimization and the unconstrained
optimization. In the Long Only Portfolio, the results suggest that the investor should
invest in three stocks which are Baxter, Procter & Gamble and, Apple with the
respective weights of 32.87%, 62.14% and 4.99%. This gives a portfolio expected
return of 6.60% with a standard deviation of 18.63%. In the Unconstrained Portfolio,
the results suggest that the investor should invest in all the stocks by going long on
Baxter (33.66%,) Caterpillar (3.90%,) Procter & Gamble (65.22%,) and Apple
(6.06%,) and shorting GE (-1.08%) and DOW (-7.75%.) The portfolio expected return
in this scenario is 7.48% and the standard deviation is 18.43%.
In the second data set, for the constrained portfolio, the results suggest that the
investor should invest only in stocks Baxter, Procter & Gamble, and Apple with the
respective proportions of 11.90%, 84%, and 4.10%. The expected return obtained is
2.06%, for a standard deviation of 13.15%. In the unconstrained portfolio, the results
suggest that the investor should go long GE (2.30%,) Baxter (12.51%,) Caterpillar
(2.96%,) Procter & Gamble (88.77%,) and Apple (9.44%,) and short Dow (-15.97%.)
The expected return obtained is 2.42% for a standard deviation of 12.51%.
Comparing the results obtained in the full data set and the 250 most recent return
sample, we can notice that there are differences in the results we get. This difference
is mainly explained by the change in the expected returns and standard deviations of
the stocks in both data sets, and we can notice that this change has an impact on the
performance of the portfolio's expected return as well as the allocation of the assets
in the portfolio. The best portfolio is chosen by using comparing the Sharpe ratios,
which gives a risk adjustment measure that compares the performance of individual
portfolios. From table X and Y in the appendix, we can say that best portfolio from
the two samples is the Unrestricted Portfolio in the full data set since it gives a higher
Sharpe ratio of 0.2432 relative to the other portfolios.

2) The Optimal Risky Portfolio

The optimal risky portfolio is the one that maximizes the Sharpe Ratio and allows
identifying the optimal weights of the risky assets in the portfolio. The formula for
the Sharpe ratio is given in the appendix in the Methodology section. The ratio seeks
to know how much additional return an investor would receive for the additional risk
of holding the risky assets over a risk-free asset. The higher is this ratio the better is
the performance of the portfolio with respect to risk and return.

Analysis of the results:

According to the table 7 and 8 in Appendix 2, for the full data set, the Long only
portfolio suggests that the investor should be fully invested in Apple stock, which
gives an expected return that is equivalent to the stock's expected return of 37.97%
and a standard deviation also equivalent of 40.28%. By comparison, the
unconstrained portfolio suggests that the investors should go long the stocks Baxter
(48.77 %,) Caterpillar (91.02%,) and Apple (211.44%,) and short the stocks GE (161.16%,) Dow (32.51,) and Procter and Gamble (-57.55%.) This gives a portfolio
expected return of 102.24% and a standard deviation of 86.71%.
In the second data set, the results suggest that the investor should invest in stocks
Caterpillar (43.63%,) and Apple (56.37%.) this gives a portfolio expected return of
60.33% and a standard deviation of 24.65%. In the unconstrained scenario, the
results suggest that the investor should go long the stocks Caterpillar (100.00%,)
Procter & Gamble (3.88%,) and Apple (100.00%,) and short the stocks GE (-18.38%,)
Dow (-41.73%,) and Baxter (-43.77%.) the expected return in this scenario is 110.34%
and the standard deviation is 36.57%.
By comparing the results of the two data sets, we notice that both optimizations give
some unrealistic results in terms of the expected returns and variances of the
portfolios, but also in terms of the proportions to be invested in the stocks. In fact, in
the full data set, the Long-Only portfolio suggests that the investor should be
invested in only one stock which eliminates any benefits from diversification and is a
very risky strategy to pursue for long term asset allocation in general. The
unconstrained portfolio is also unrealistic in terms of the weights that are attributed
to the portfolios as some of them reach 100% proportion to be invested in, which is
not possible because it doesn't allow for proper asset diversification. The only
portfolio that seems to be realistic is given in the second data set where the expected
return is of 60.33%, which seems quite attractive given the level of risk that is

suggested of 24.65%, and that is what one could consider as a realistic result since
the proportions to be invested are shared between two stocks as it is the minimum
diversification of risky assets that one could consider given the constraint of
maximizing the Sharpe ratio.

3) The Optimal Complete Portfolio

The optimal complete portfolio is the portfolio that consists of the optimal risky
assets and the risk free asset. The optimal complete portfolio is determined by
maximizing the investor's utility function which is defined in Appendix 1. The result
of the optimization gives the proportions to be invested in the risky assets and the
risk free assets, which allows the investors to be properly diversified based on three
main components that are, expected return, volatility, and risk aversion.

Analysis of the results:

According to table 9 and 10 Appendix 2, for the full data set, the Long-Only portfolio
suggests that the optimal complete portfolio is the one that provides an expected
return of 33.13% and a standard deviation of 34.72%. The proportion to be invested
in the risky assets is 86.16%, and the proportion to be invested in the risk free asset is
13.84%. In this scenario, the maximization of the investors utility function suggests
that the investor should be diversified between Apple stock and the risk free asset. In
the unconstrained scenario, the optimization results in a portfolio expected return of
55.39%, and a standard deviation of 45.78%. The investor's portfolio in this case
consists of 52.77% in risky assets and 47.23% in the risk free asset.
For the positions in the risky assets, the investor should go long the stocks Baxter
(48.76 %,) Caterpillar (91.06 %,) and Apple (211.53 %,) and short the stocks GE (161.24 %,) Dow (-32.53 %,) and Procter and Gamble (-57.58 %.)
The Long-Only portfolio in the second data set suggests that the investor should
invest 90% of the portfolio in risky asset, and 10% in the risk free asset. The
proportions of the risky assets are as follows: 98.84% in Dow, and 1.16% in
Caterpillar. In the unconstrained portfolio, the results suggest that the investor
should invest 90% in risky assets, and 10% in the risk free asset. The distribution of
the asset weights is as follows: the investor should go long the stocks DOW (100%),
Caterpillar (100 %,) GE (100 %,) and short Procter & Gamble (-64.13 %,) and Baxter
(-100 %,) and Apple (-35.87%.)

When comparing the two samples, we notice that the unconstrained portfolios in
both data sets provide some unrealistic results in terms of the portfolio weights as
some of them equal or exceed 100% of the portfolio's total weight. In the second data
sets when we eliminate some of the constraints that allow us to have more accurate
data, the result obtained show very large values that are completely unrealistic and
prevent us from drawing any meaningful conclusions. In the full data set, the LongOnly portfolio although it suggests that the investor should be mixed between risky
assets and the risk free asset does not provide proper diversification as the portfolio
of risky assets is concentrated on one stock which is Apple stock, however, it seems
that it is the one that provides the most realistic result.

4) The Efficient Frontier and the Capital

Allocation Line
Drawing the efficient frontier is the last step that allows the investors to visualize the
optimal portfolios computed previously and choose the best alternatives that are
offered given the results that are produced, and whether they are realistic or not. The
Appendix 2 provides 4 graphs for both data sets that show the efficient frontier given
the constrained and the unconstrained optimized portfolios. The capital allocation
line which is determined by maximizing the Sharpe ratio is represented on each of
the graphs and shows the optimal risky portfolios as well as the optimal complete
portfolios. The indifference curve drawn display the curve of equally preferred
portfolios that will generate the same utility to the investor. In the second data set, it
was not possible to draw the Capital Allocation Line as the values obtained were
inaccurate and extremely large. Moreover, the points showing the Optimal Risky
Portfolio and the Optimal Complete Portfolio are those that were computed given the
constraints that we have set in Appendix 1, for the purpose of obtaining more
accurate results. This shows one of the limitations of the Mean Variance optimization
model as it fails to provide meaningful results when using a small number of
observations in the sample that we used.

5) Recommendation to the Investor

The results obtained from each type of portfolio are summarized in tables 11 and 12.
For a matter of convenience, we labeled the portfolios from Portfolio 1 to 12. In the
recommendation to the investor we suggest to look first at the portfolios that give
some realistic results, and then we can compare which ones provide the best results
by using the Sharpe ratio as a measure of performance. Based on the results
obtained, the portfolios that have been chosen are Portfolio 1, 2, 4, 7 and 10.

Portfolios 1 and 7 do not provide a satisfying performance to the investor as the

returns are lower than the risk free asset, and the risks observed are too high. In this
case the investor is better off investing all his money into the risk free asset at 3%.
Portfolio 2 is based on the Optimal Risky Portfolio in the second data set, and gives
the highest Sharpe ratio of 156.62% with the following proportions: Caterpillar
(43.63 %,) and Apple (56.37 %.) In comparison, portfolios 4, and 10 offer lower
returns, hence, lower Sharpe ratios, but they also allow for more diversification
among the stocks, and they give a relatively lower risk compared to portfolio 2. From
a fundamental perspective, we recommend that the investors should always stay
diversified between risky and the risk free asset in order to protect themselves
against any unexpected downturn in the markets. For this, we suggest that the
investors should choose to invest 70 percent in Portfolio 2, and 30% in the risk free
asset. This will lower, the standard deviation to 17.262% for an Expected return of
42.24%. This gives a pretty high expected performance in comparison with the
S&P500 performance of 2010 which was of 15.65%, and it allows the investors to be
less exposed to risk compared with portfolios 4 and 10.

Conclusion
The project's main objective was to identify the optimal allocation of assets from a
portfolio containing risky assets and one that includes a risk free asset. The
allocations obtained were based on the Markowitz Mean Variance Optimizations,
and resulted in three kinds of portfolio along with the efficient frontiers for both
samples of data that we have used. In the analysis of the results, we have found some
unrealistic values that we judge are due to the assumptions that we made earlier,
which reflect some of the limitations of the Model.
In fact the first limitation that we can state is the assumption of normality on the
returns in both data sets which seems to be unrealistic given the distributions that we
have obtained. There is strong evidence that most stock returns display asymmetrical
returns as well as showing excess Kurtosis which makes the model used hardly
applicable and is responsible for the large values obtained. Second, the model
assumes that investors will hold their investment on a fixed time horizon, and will
never change the asset allocation, which is false given that some times, investors
need to rebalance their portfolios shifting from the risky assets to treasury bills and
other risk free assets depending on the market. Finally, the model focuses mainly on
minimizing the volatility given a specific return or the opposite, and this is not
compatible with today's environment in the sense that investors' views and objectives

are more sophisticated, and therefore require to use enhanced models such as the
Black and Litterman Model.

Appendix 1: Methodology Section

1. Computing Returns and Standard Deviations:
The first step is to process the historical prices into returns and determine the
individual stock returns as well as the standard deviations.
The daily stock returns from the stocks' closing prices are calculated using the oldest
historical prices as the base dates. The computation of the daily stock returns is done
using the following formula:

Daily stock return= (Closing price of the current

trading day - Previous day's closing Price) /
Previous day's closing Price
We then compute the expected returns of the stocks in the portfolio using the simple
arithmetic mean of returns formula, which is as follows:

AR = (R1 + R2 + R3 + + RN) / N
The returns obtained are then annualized by multiplying the expected returns by 250
trading days on average in a given year.
In order to calculate the risk of individual stocks, we used the STDEV function in
Excel by selecting the daily returns calculated in the two data sets, and annualizing
the values obtained by multiplying by the square root of 250 trading days on average
per year.

2. The Jarque and Bera Test for Normality

The Jarque-Bera test statistic for normality follows a chi-square distribution with 2
degrees of freedom. Concerning the analysis of the stock returns in the two data sets,
I used the 99% confidence interval for which the critical value is 9.21 at 2 degrees of
freedom. If the test statistic is higher than the critical value, we reject the null
hypothesis that the monthly returns are normal, otherwise we accept it, and we can
assume the returns are normal.

Skewness gives the measure of asymmetry of the distribution, and is defined by the
following formula:
Where T is the time period or the length of the data used, and

.
Kurtosis is the measure of the flatness of the distribution, and is defined as follows:
This leads to the computation of the Jarque-Bera test statistic which is as follows:

3. Volatility Clustering
Volatility clustering is another important factor that can help to understand the
patterns of the variations among stock returns. To show evidence of volatility
clustering in the two data sets, we plotted the stock returns in a time series graph,
and analyzed the different patterns of the individual stocks using the complete data
set first, and then analyzing the most recent 250 stock returns to see if the patterns
display some periods of high volatilities show some extreme returns, which are
followed by periods of relatively low volatilities.

4. Measurement of Portfolio Risk and Return

After computing the expected returns and risks of individual stocks, we define some
of the formulas for computing the portfolio risk and return that will be used in the
optimization process.
Modeling the Portfolio Risk
The portfolio risk is generally referred to as the portfolio variance. In our case of
many assets, the variance of the portfolio takes the form of a matrix and has the
following general formula:
Where w1 to wn is a matrix that refers to the weights of the assets 1 to N in the
portfolio, and xy is the covariance between assets x and y.
In practice it is more useful to use the correlation matrix to derive the covariance
matrix as it is generally unknown, and we have already computed the standard
deviations of the individual stocks.
In fact, we can derive the covariance matrix using the following formula:

(x,y) = covariance(x,y)/x y
Where xy is the correlation between assets x and y, and n is the standard
deviation of the nth asset. Hence we obtained the following:
In excel, we used the following formula given that we have already computed the
correlation matrix (appendix), the standard deviations and the expected returns of
the stocks:

{MMULT(MMULT(TRANSPOSE(wnn);
(x,y)); wnn)}
Where wnn is the matrix that results from the multiplication of the portfolio
weights with the standard deviations of individual stocks, and (x,y) is the
correlation matrix.
Determining the Portfolio's Expected Return
The portfolio expected return is the sum of the product of the holding of the assets by
the expected returns of the individual assets, and is represented as follows:
Where the sum of the weights = 1, n is the number of securities held in the portfolio
which is 6 stocks in our case, wi is the proportion invested in a given stock i, E(ri) is
the expected return on the stock i.

The Optimization Process

The optimizations were run based on some investment constraints and without any
investment constraints. In the constrained optimization scenario, we restricted
having short positions in the market meaning that all the optimal weights should be
positive or equal to 0. Also, we set the sum of the proportions invested in each stock
to equate 1, and finally, we select the range of cells that should be changed in order to
obtain the optimal weights for each type of portfolio that we want to have. In the
unconstrained optimization scenario, we allowed for both short and long positions to
occur, but we still keep the restriction on the sum of the optimal weights, setting it
equal to 1. In the second data set, in the Optimal Risky Portfolio and Optimal
Complete Portfolios, we add more constraints such as limit the individual weights
from exceeding 100% or -100% of the portfolio, and setting the proportion invested
in the risky assets not to exceed 90% in order to obtain a minimum level of

diversification between the risky asset and the risk free asset in both the constrained
and unconstrained portfolios.

Sharpe Ratio
The sharpe ratio is a risk adjusted measure to evaluate portfolio performance and is
based on the following formula:
Source: Investopedia.com

The investor's utility function

The investor's utility function used in this project is a quadratic function that is
represented as follows:
Where is the utility value, and A is the investor's level of risk aversion. The number
0.005 is a scaling factor used by convention to express the expected return and
standard deviation as percentages.
The optimal complete portfolio would be the one that provides the highest utility by
maximizing the formula using the Excel Solver. The result gives the optimal
proportion to be invested in the risky asset which is represented by the following
formula:
The proportion invested in the risk free asset is given by: 1 - Y

Appendix 2: Tables and Charts

Asset Data (Full Data Set)
Expected Return
Standard Deviation
GE
-3.62%
38.77%

DOW

5.45%
43.86%

Baxter
7.68%
24.63%

Caterpillar
17.78%
38.93%

Procter and Gamble

3.51%
20.51%

Apple
37.97%
40.29%

Table 1: Stock Return and Standard Deviations

Using the Full Data Set
Asset Data (250 Most recent returns)
Expected Return
Standard Deviation
GE
22.75%

27.43%

DOW
31.99%
36.29%

Baxter
-14.10%
24.40%

Caterpillar
64.69%
29.83%

Procter and Gamble

1.68%
13.49%

Apple
56.95%
25.49%

Table 2: Stock Return and Standard Deviations

Using the 250 Most recent returns
Full Data Set

GE
DOW

BAX
CAT
P&G
AAPL
Kurtosis
9.283169
7.042409
7.47999063
5.080399
7.659262
4.260446

Skewness
0.417837
-0.08243
-0.622318643
0.160727
-0.03425
-0.02987

JB Test Statistic
2121.731
871.6094

1151.235074
235.9717
1156.239
84.78961

Table 3: The Jarque-Bera Test for Normality

Using the Full Data Set
250 Most Recent Returns

GE
DOW
BAX
CAT
P&G
AAPL
Kurtosis
2.414595
2.058731
21.2954
1.601479884
2.562847
2.396152

Skewness

0.170671
-0.32919
-2.61641
0.112397247
-0.20665
0.316714

JB Test Statistic
4.783472
13.74422
4.783472
20.89990707
3.769913
7.977748

Table 4: The Jarque-Bera Test for Normality

Using 250 Most recent returns
Full Data Set

Long Constraint
Unconstrained
Portfolio Expected return=
6.60%
7.48%

Portfolio Variance =

3.47%
3.40%

Portfolio SD =
18.63%
18.43%

Risk Free Asset =

3.00%
3.00%

Sharpe Ratio =
0.1933
0.2432

Portfolio Weights
GE
0.00%
-1.08%
DOW
0.00%
-7.75%
BAXTER

32.87%
33.66%
CAT
0.00%
3.90%
P&G
62.14%
65.22%
AAPL
4.99%
6.06%

Table 5: Minimum Variance Portfolio using the

Full Data Set
250 Most Recent Returns

Long Constraint
Unconstrained
Portfolio Expected Return=
9.84%
1.45%

Portfolio Variance =
2.28%
1.57%

Portfolio SD =
15.11%
12.52%

Risk Free Asset =

3.00%
3.00%

Sharpe Ratio =
45.31%
-12.37%

Portfolio Weights
GE
7.27%
3.05%
DOW
0.00%
-15.57%
BAXTER
32.14%
12.52%
CAT
0.00%

2.38%
P&G
39.40%
89.78%
AAPL
21.18%
7.82%

Table 6: Minimum Variance Portfolio using the

250 Most Recent Returns
Full Data Set

Long Constraint
Unconstrained
Sharpe Ratio =
86.79%
114.44%

Portfolio Expected Return=

37.97%
102.24%

Portfolio Variance =
16.23%
75.20%

Portfolio SD =

40.29%
86.72%

Risk Free Asset =

3.00%
3.00%

Portfolio Weights
GE
0.00%
-161.16%
DOW
0.00%
-32.51%
BAXTER
0.00%
48.77%
CAT
0.00%
91.02%
P&G

0.00%
-57.55%
AAPL
100.00%
211.44%

Table 7: Optimal Risky Portfolio using the Full

Data Sets
250 Most Recent Returns

Long Constraint
Unconstrained
Sharpe Ratio =
232.49%
293.41%

Portfolio Expected Return=

60.33%
110.34%

Portfolio Variance =
6.08%
13.38%

Portfolio SD =
24.66%
36.58%

Risk Free Asset =

3.00%
3.00%

Portfolio Weights
GE
0.00%
-18.38%
DOW
0.00%
-41.73%
BAXTER
0.00%
-43.77%
CAT
43.63%
100.00%
P&G
0.00%
3.88%
AAPL
56.37%
100.00%

Table 8: Optimal Risky Portfolio using the 250

Most Recent Returns
Full Data Set

Long Constraint
Unconstrained
Investor Utility Function to Maximize
0.329779696
0.551279771

Expected Return on the Complete Portfolio

33.13%
55.39%

Variance of the Complete Portfolio

0.120514451
0.209559707

Standard Deviation of the Complete Portfolio

34.72%
45.78%

Coefficient of Risk Aversion (A)

2.50
2.50

Y (% investment in risky assets)

86.16%
52.77%

Portfolio Expected Return=

37.97%
102.29%

Portfolio Variance =
16.23%
75.26%

Portfolio SD =
40.29%
86.75%

Risk Free Rate =

3.00%
3.00%

Sharpe Ratio =
86.79%
114.44%

Portfolio Weights

GE

0.00%
-161.24%
DOW
0.00%
-32.53%
BAXTER
0.00%
48.76%
CAT
0.00%
91.06%
P&G
0.00%
-57.58%
AAPL
100.00%
211.53%

Table 9: Optimal Complete Portfolio Using the

Full Data Set

Long Constraint
Unconstrained

Investor Utility Function to Maximize

0.293024078
1.006325758

Expected Return on the Complete Portfolio

29.43%
101.12%

Variance of the Complete Portfolio

10.57%
39.25%

Standard Deviation of the Complete Portfolio

32.52%
62.65%

Coefficient of Risk Aversion (A)

2.50
2.50

Y (% investment in risky assets)

90.00%
90.00%

Portfolio Expected Return=

32.37%
112.03%

Portfolio Variance =
13.05%
48.46%

Portfolio SD =
36.13%
69.61%

Risk Free Rate =

3.00%
3.00%

Sharpe Ratio =
81.29%
156.62%

Portfolio Weights
GE
0.00%
100.00%
DOW
98.84%
100.00%
BAXTER
0.00%

-100.00%
CAT
1.16%
100.00%
P&G
0.00%
-64.13%
AAPL
0.00%
-35.87%

Table 10: Optimal Complete Portfolio Using the

250 Most Recent Returns
Full Data Set

Long Only Portfolio (Constrained)

Protfolio Expected Return

Portfolio Standard Deviation
Portfolio 1: Minimum Variance Portfolio
2.06%
13.15%

Portfolio 2: Optimal Risky Portfolio

60.33%

24.66%

Portfolio 3: Optimal Complete Portfolio

29.43%
32.52%

Long Only Portfolio (Constrained)

250 Most Recent Returns

Protfolio Expected Return

Portfolio Standard Deviation
Portfolio 4: Minimum Variance Portfolio
6.60%
18.63%

Portfolio 5: Optimal Risky Portfolio

37.97%
40.29%

Portfolio 6: Optimal Complete Portfolio

33.13%
34.72%

Table 11: Summary Table of the Results Obtained

From the Optimizations
Full Data Set

Long-Short Portfolio (Unconstrained)

Portfolio Expected Return

Portfolio Standard Deviation
Portfolio 7: Minimum Variance Portfolio
2.42%
12.51%

Portfolio 8: Optimal Risky Portfolio

110.34%
36.58%

Portfolio 9: Optimal Complete Portfolio

101.12%
62.65%

Long-Short Portfolio (Unconstrained)

250 Most Recent Returns

Portfolio Expected Return

Portfolio Standard Deviation
Portfolio 10: Minimum Variance Portfolio
7.48%
18.43%

Portfolio 11: Optimal Risky Portfolio

102.24%
86.72%

Portfolio 12: Optimal Complete Portfolio

55.39%
45.78%

Table 11: Summary Table of the Results Obtained

From the Optimizations
Efficient Frontiers: Full Data Set
Efficient Frontiers: 250 Most Recent Returns
Volatility of Returns: Full Data Set
Volatility of Returns: 250 Most Recent Returns