Efficient Frontier and Capital Allocation Line (CAL) Template Strictly Confidential

Notes
This Excel model is for educational purposes only and should not be used for any other reason.
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© Corporate Finance Institute®. All rights reserved.
Efficient Frontier and CAL Template

E(R1) = 12.15% sigma(R1) = 24.43%

E(R2) = 6.93% sigma(R2) = 9.96%

rho(R1,R2) = 0.15

Portfolio standard Portfolio expected

deviation return Sharpe Ratio
w1= 0 9.96% 6.93% 37.45%
0.1 9.64% 7.45% 44.12%
0.2 9.95% 7.97% 47.97%
0.3 10.85% 8.50% 48.83%
0.4 12.20% 9.02% 47.71%
0.5 13.87% 9.54% 45.72%
0.6 15.76% 10.06% 43.55%
0.7 17.80% 10.58% 41.49%
0.8 19.94% 11.11% 39.65%
0.9 22.16% 11.63% 38.04%
1 24.43% 12.15% 36.64%

This file is for educational purposes only. E&OE

Corporate Finance Institute®

https://corporatefinanceinstitute.com/
P o rtfo lio ex pected return

Portfolio Frontier
14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
2.00% 6.00% 10.00% 14.00% 18.00% 22.00% 26.00% 30.00%

Portfolio standard deviation

© Corporate Finance Institute®. All rights reserved.
Efficient Frontier and CAL Template

E(R1) = 15.00% sigma(R1) = 18%

E(R2) = 7.00% sigma(R2) = 10%

rho(R1,R2)= - 0.15

Portfolio standard Portfolio expected

deviation return
w1= 0.534482758645874 9.96% 6.93%
0.2 8.27% 8.60%
0.3 8.17% 9.40%
0.4 8.65% 10.20%
0.5 9.62% 11.00%
0.6 10.94% 11.80%
0.7 12.51% 12.60%
0.8 14.24% 13.40%
0.9 16.08% 14.20%
1 18.00% 15.00%
10.00% 7.00%
x y
Graph the CAL: 0 0.05
0.01 0.0519
0.02 0.0539
0.03 0.0558
0.04 0.0578
0.05 0.0597
0.06 0.0616
0.07 0.0636
0.08 0.0655
0.09 0.0674
0.1 0.0694
0.11 0.0713
0.12 0.0733
0.13 0.0752
0.14 0.0771
0.15 0.0791
0.16 0.0810
0.17 0.0829
0.18 0.0849
0.19 0.0868
0.2 0.0888
 Risk free = 5%

Market risk
premium Sharpe ratio
1.93% 0.1938 <= the optimal portfolio found using solver
In solver, set the objective as "to max" the Sharpe ratio, and set "by changing variables
This gives the optimal portfolio.
P o rt fo lio ex p ect ed ret u rn

Portfolio Frontier
16.00%

14.00% Optimal
Portfolio
12.00%

10.00%
Optimal CAL
8.00%

6.00%

4.00%
0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% 20.00%

Portfolio standard deviation

t "by changing variables" as asset weight w1.

16.00% 18.00% 20.00%