Abstract
Portfolio managers and investors strive to achieve the best possible trade-off between risk and return, and one of the tools they use is constructing mean-variance efficient portfolios. Finance students learn about optimal portfolios and efficient frontiers, though it is difficult to replicate them unless they have access to sophisticated software. This paper develops a teaching module that uses Microsoft Excel® to create mean-variance portfolios and traces out the efficient frontier using real-world data. In the process, the students learn to determine optimal investment allocations in a portfolio, select the optimum investment portfolio given investor’s objectives and preferences and learn about factors that influence different asset allocations. For multiple assets (N>3), the paper uses Matrix algebra in Excel®. The paper enables students and investors to learn how to construct real-world mean-variance efficient portfolios using Excel®.
Highlights
Finance theory has become increasingly mathematical, but there is a dearth of computational finance materials at the undergraduate level which is likely because undergraduate finance and economics tend to be taught in business schools or under social sciences and more mathematically oriented courses are in mathematics and natural science departments
In recent years we have seen an increase in academic programs that support computational finance but mostly at the graduate level (Roychoudhury, 2007)
This paper provides a teaching tool to create mean-variance portfolios and traces out the efficient frontier using real-world data and Microsoft Excel®
Summary
Finance theory has become increasingly mathematical, but there is a dearth of computational finance materials at the undergraduate level which is likely because undergraduate finance and economics tend to be taught in business schools or under social sciences and more mathematically oriented courses are in mathematics and natural science departments. In recent years we have seen an increase in academic programs that support computational finance but mostly at the graduate level (Roychoudhury, 2007). One of the first papers which laid the groundwork for mathematical theorization in finance was Portfolio Selection by Markowitz (1952). The paper introduced the Modern Portfolio Theory (MPT) and formulated the concept of optimal portfolios and the efficient frontier. This paper provides a teaching tool to create mean-variance portfolios and traces out the efficient frontier using real-world data and Microsoft Excel®. The students learn to determine optimal investment allocations in a portfolio, select the optimum investment portfolio given investor’s objectives and preferences and learn about factors that influence different asset allocations
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
