MarkowitzModel.pptVIP

Markowitz Model Markowitz Model Markowitz Model: Solution Single Index Model Single Index Model (Cont’d) Single Index Model (Cont’d) Single Index Model (Cont’d) Single Index Model Solution * For 3-stock portfolio, short selling allowed Eg. RA= 20% RB= 10% RC= 8% ?2A=100 ?2B=25 ?2C=16 ?AB= 15 ?AC= 20 ?BC= 4 Form the Lagrangian For R* = 15% wA = 50.214% wB = 48.715% wC = 1.075% Standard Dev = 6.22% For R* = 20% wA = 91% wB = 56% wC = -47% (short sale) Standard Dev = 9.47% Rt= A + BRmt + et E(Rt) = A + BE(Rmt) Cov(ei,ek)=0 E(ei)=0 Cov(ei,Rm)=0 ?2p=?Pi[R