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Sample Optimization - Exercise (Mywork)

The document contains annual return data for 4 assets from 2014-2018. It calculates the expected returns, risk, and Sharpe ratio for each asset. The initial weights for a portfolio with these 4 assets was 25% for each. It provides the inputs needed to calculate the optimal weights, portfolio return, variance and Sharpe ratio for the portfolio. The variance-covariance matrix for the assets is required but not shown.

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sushant ahuja
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27 views

Sample Optimization - Exercise (Mywork)

The document contains annual return data for 4 assets from 2014-2018. It calculates the expected returns, risk, and Sharpe ratio for each asset. The initial weights for a portfolio with these 4 assets was 25% for each. It provides the inputs needed to calculate the optimal weights, portfolio return, variance and Sharpe ratio for the portfolio. The variance-covariance matrix for the assets is required but not shown.

Uploaded by

sushant ahuja
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Year Asset 1 Asset 2 Asset 3 Asset 4

2014 15% 11% 18% 19%


2015 12% 13% 3% 12%
2016 10% 14% 2% 5%
2017 2% 9% 11% 9%
2018 8% 5% 6% 8%

Asset 1 Asset 2 Asset 3 Asset 4


Expected
returns 9.40% 10.40% 8.00% 10.60%
Risk 4.4% 3.2% 5.9% 4.8%

Return to
risk ratio
(Sharpe) 0.55 1.06 0.17 0.76

Initial
weights 25% 25% 25% 25%

Risk free rate 7%


Year Asset 1 Asset 2 Asset 3 Asset 4
2014 15% 11% 18% 19%
2015 12% 13% 3% 12%
2016 10% 14% 2% 5%
2017 2% 9% 11% 9%
2018 8% 5% 6% 8%

Asset 1 Asset 2 Asset 3 Asset 4


Expected returns 9.40% 10.40% 8.00% 10.60%
Risk 4.4% 3.2% 5.9% 4.8%
Return to risk
ratio (Sharpe) 0.55 1.06 0.17 0.76

Initial weights 25% 25% 25% 25%

Risk free rate 7%

To calculate COVAR matrix

𝑼𝒏𝒆𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝒓𝒆𝒕𝒖𝒓𝒏𝒔=𝒙−𝒙 ̅
Asset 1 Asset 2 Asset 3 Asset 4
2012 5.6% 0.6% 10.0% 8.4%
2013 2.6% 2.6% -5.0% 1.4%
2014 0.6% 3.6% -6.0% -5.6%
2015 -7.4% -1.4% 3.0% -1.6%
2016 -1.4% -5.4% -2.0% -2.6%

𝑼𝒏𝒆𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝒓𝒆𝒕𝒖𝒓𝒏𝒔 𝒕𝒓𝒂𝒏𝒔𝒑𝒐𝒔𝒆= 〖 (𝒙−𝒙 ̅) 〗 ^𝑻=(𝒚−𝒚 ̅)


2012 2013 2014 2015 2016
Asset 1 0.19% 0.06% 0.04% 0.13% #N/A
Asset 2 0.06% 0.10% -0.04% 0.01% #N/A
Asset 3 0.04% -0.04% 0.35% 0.22% #N/A
Asset 4 0.13% 0.01% 0.22% 0.23% #N/A

𝑽𝒂𝒓𝒊𝒂𝒏𝒄𝒆 𝒄𝒐𝒗𝒂𝒓𝒊𝒂𝒏𝒄𝒆 𝒎𝒂𝒕𝒓𝒊𝒙=(𝒚−𝒚 ̅ )∗(𝐱−𝒙 ̅)/𝑵

Asset 1 Asset 2 Asset 3 Asset 4


Asset 1
Asset 2
Asset 3
Asset 4
Inputs in column format

Initial weights Exp returns


Asset 1 25.0% 9.4%
Asset 2 25.0% 10.4%
Asset 3 25.0% 8.0%
Asset 4 25.0% 10.6%
Sum 100%

Portfolio returns wTR 9.60% variance 0.11%

Portfolio variance wTΣw 79.90% 3.25%


Sharpe ratio

Err:502
Err:502
Err:502
Err:502
Asset 1 Asset2 Asset3 Asset4
2014 15% 11% 18% 19%
2015 12% 13% 3% 12%
2016 10% 14% 2% 5%
2017 2% 9% 11% 9%
2018 8% 5% 6% 8%
Expected returns 9.40% 10.40% 8.00% 10.60%

Variance covariance matrix Σ

Risk free rate 7%

Optimal weights direct calculation

 1 ( Ri  R f )  1 ( Ri  R f )
wi opt  
Sum( 1 ( Ri  R f )) 

Optimal weights
Asset 1
Asset 2
Asset 3
Asset 4
Inputs in column format

Optimal weights Expected returns


Asset 1 25.0% 9.4%
Asset 2 25.0% 10.4%
Asset 3 25.0% 8.0%
Asset 4 25.0% 10.6%
100%

Portfolio returns (opt) wTR


Portfolio variance (optwTΣw
Sharpe ratio (opt)

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