This workbook is meant to accompany "Commercial Real Estate Analysis & Investments", 3rd Edition, by D.

Gelt
This workbook is meant strictly for educational use. No liability is assumed for the content or usage of this educ

The worksheets contained herein present templates for applying portfolio theory to optimize portfolio allocation
The authors aknowledge Konstantinos Kalligeros for preparation of this workbook.

stments", 3rd Edition, by D.Geltner & N.Miller, Thomson/South-Western College Publishing Co.
he content or usage of this educational tool.

y to optimize portfolio allocations.

READ ME FIRST!

There are no macros in this version.

Worksheet tab:
DATA & STATS
Copy and paste into the spreadsheet the periodic returns, obtained from ENCORR or other database.
Use the white cells to enter names for them. Even if you have fewer than 14 assets, enter dummy names for all of them. The spreadsheet is fancy and d
don't exist, but I haven't tested to see how the OPTIMIZER and CAPM work without all 14 assets.

Alternatively, if you dont' want to use historical data to govern your risk and return expectations inputs (i.e., you are working with user-specified ex ante m

Corrections
Use this spreadsheet to correct the historical statistics with forward-looking expectations for the returns, volatilities and correlations.
The values you enter in the white cells will be ADDED algebraically to the historical data. Remember that both volatilities and returns are
expressed per time period used in the raw data (previous worksheet). That is, don't add annual return corrections to monthly return data, or you'll get sil

This is where you also get rid of the dummy securities, by ensuring that they don't enter you portfolio choice. How? By assigning very low (even negative
and very high volatility and correlation with the other assets.

If you are working with user-specified ex ante mean and volatilities and correlations inputs (not historical data), then zero out the DATA & STATS sheet a

The cells with white font on chaded background generate the correlation and covariance matrices (by adding the triangular matrices to their transposes)

OPTIMIZER(all risky)
In the E[r] column, enter the expected returns for which you want the frontier to be drawn. In the portfolio weights area, you may initially enter some arbi
optimizer to start with. I enter an equally weighted porftolio everywhere (or sometimes zeros everywhere works better). From an optimization perspective

Invoke the Excel Solver (in the "Data" menu - it's an add-in so you must have it installed, it's free). Run the Solver repeatedly five times to map out the e
What the Solver does here is, for every E[r] you have entered, it changes the portfolio weights so that the variance (in cell E36) is minimized, and
1 The sum of the weights is equal to 100%.
2 The expected return (weighted average) return of the portfolio is equal to your expected return (one at a time).
Run the Solver five times, each time with a different target return from the list of target returns in the white cell range B8:B12.
After each Solver run, copy/paste its optimal weights solution from row 19 into the same columns in the row range 8:12 corresponding to to the target Er
You will also have to copy/paste (values) the resulting PORTFOLIO STD in cell E37 into the StD cell in the C8:C12 range corresonding to the target retu

The cells with white font on shaded background compute the variance for each portfolio, and are used for moving data around the spreadsheet. Don't w
Note that the target (expected) return values E[r] in range B8:B12 should be ordered from lowest (top, in B8) to highest (bottom, in B12).
You may want to approximately equally-space these target return values to get a well-mapped efficient frontier.
The first (lowest, top) E[r] value in principle should correspond to the minimum possible variance portfolio.
To find this you will have to iterate a bit, experiment with different E[r] values and observe the resulting optimal portf StD in cell C8.
(You could start with the minimum expected return from among your non-dummy assets in row 17, and then work up from there.)
Or (easier), you could invoke the Solver, only without the target return constraint.

OPTIMIZER (riskless)
Here we assume there is a riskless asset. Enter its return. Also, enter the target return you want to achieve. Then invoke the Solver.
Here the Solver is set to MAXimize the portfolio Sharpe Ratio (in cell D8) with no restrictions (other than the weights summing to 100%).
"Rm" is the expected return of this Sharpe-maximizing porfolio (would be the presumed "market portfolio" in a CAPM world where everyone shares the e
You also get results about how much of MKT and how much of the riskless asset you should use to get that target return. For example, 60% MKT and 4
23% S&P500 means that you should be investing 0.60 x 0.23 of your money into S&P500.
CHART_Er_VOL
Efficient frontier chart and "CAPM" Security Market Line (segment), similar to Exhibit 21-11b (page 538).

CHART_portfolio comp
Area chart of efficient frontier portfolios allocation shares (like Exhibit 21-9, page 532). You may want to add or remove series, change the axis range, tit

all of them. The spreadsheet is fancy and deletes the entries of assets that

u are working with user-specified ex ante mean and volatilities and correlations inputs), then if your prefer you can zero out the DATA & STATS sheet and then go to the Corre

lities and correlations.

volatilities and returns are
ons to monthly return data, or you'll get silly results!

How? By assigning very low (even negative) returns to them

), then zero out the DATA & STATS sheet and go to the Corrections sheet and enter your risk and return expectations directly there. The optimization (Solver) takes its inputs

the triangular matrices to their transposes). Mechanics

hts area, you may initially enter some arbitrary weights for the
s better). From an optimization perspective, this is not the most efficient starting vector, but it works!

lver repeatedly five times to map out the efficient frontier on five points.
ance (in cell E36) is minimized, and

range B8:B12.
ange 8:12 corresponding to to the target Er the Solver solution applies to (the one you just ran).
:C12 range corresonding to the target return you just ran.

ving data around the spreadsheet. Don't worry about them!

o highest (bottom, in B12).

l portf StD in cell C8.

work up from there.)

hen invoke the Solver.

eights summing to 100%).
CAPM world where everyone shares the expectations you entered), and "StD" is the volatility of this portfolio.
rget return. For example, 60% MKT and 40% riskless, and, say

r remove series, change the axis range, titles, legends, and labels in this chart, to reflect your exercise.

TATS sheet and then go to the Corrections sheet and enter your risk and return expectations directly there. The optimization (Solver) takes its inputs from the Corrections shee

ptimization (Solver) takes its inputs from the Corrections sheet.

its inputs from the Corrections sheet.

HISTORICAL DATA AND STATISTICS

RETURNS
Stocks
0.127
VOLATILITY (per time increment of data)
0.175

Bonds Real Estate

0.097
0.099

4
#DIV/0!

5
#DIV/0!

6
#DIV/0!

7
#DIV/0!

8
#DIV/0!

0.118

0.090

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

0.2721
1.0000

0.1658
-0.2104
1.0000

#VALUE!
#VALUE!
#VALUE!
#VALUE!

#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

Bonds Real Estate

12.11%
20.55%
13.23%
16.09%
5.69%
2.40%
-1.11%
6.18%
4.35%
-4.45%
9.20%
5.43%
16.76%
25.06%
-0.68%
10.26%
-1.18%
21.01%
-1.23%
24.30%
-3.95%
15.56%
1.86%
20.96%
40.36%
-2.49%
0.65%
14.19%
15.48%
14.34%
30.97%
8.16%
24.53%
1.91%
-2.71%
4.18%
9.67%
7.88%
18.11%
3.31%
6.18%
-5.78%
19.30%
-10.63%
8.05%
1.23%
18.24%
12.39%
-7.77%
17.05%
31.67%
11.49%
-0.93%
16.10%
15.85%
19.71%

CORRELATION MATRIX
Stocks
Bonds
Real Estate
4
5
6
7
8
9
10
11
12
13
14

1.0000

HISTORICAL RETURNS
ASSET DATE
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997

Stocks
4.01%
14.31%
18.98%
-14.66%
-26.47%
37.20%
23.84%
-7.18%
6.56%
18.44%
32.42%
-4.91%
21.41%
22.51%
6.27%
32.16%
18.47%
5.23%
16.81%
31.49%
-3.17%
30.55%
7.67%
9.99%
1.31%
37.43%
23.07%
33.36%

1998
1999
2000
2001
2002
2003

28.58%
21.04%
-9.11%
-11.88%
-22.10%
28.70%

13.06%
-8.96%
21.48%
3.70%
17.84%
1.45%

19.13%
5.12%
13.39%
0.83%
6.47%
15.68%

9
#DIV/0!

10
#DIV/0!

11
#DIV/0!

12
#DIV/0!

13
#DIV/0!

14
#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

10

11

12

13

14

Forward-looking corrections
RETURNS CORRECTIONS -- additive
Stocks
-3%

Bonds Real Estate

-4%
-3%

4
-100%

5
-100%

6
-100%

7
-100%

8
-100%

VOLATILITY CORRECTIONS -- additive

-2%

-4%

1%

0%

0%

100%

100%

100%

3%

8%
36%

0%
0%
0%

100%
100%
100%
100%

100%
100%
100%
100%
100%

100%
100%
100%
100%
100%
100%

100%
100%
100%
100%
100%
100%
100%

Stocks
10.00%

Bonds Real Estate

6.00%
7.00%

4
-100.00%

5
-100.00%

6
-100.00%

7
-100.00%

8
-100.00%

15.00%

8.00%

10.00%

0.00%

0.00%

100.00%

100.00%

100.00%

CORRECTED CORRELATIONS
Stocks
Bonds
Real Estate
4
5
6
7
8
9
10
11
12
13
14

1.0000
0.3000
0.2500
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

0.3000
1.0000
0.1500
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

0.2500
0.1500
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

FINAL COVARIANCE MATRIX

StD
15.00%

0.150
0.023

0.080
0.004

0.100
0.004

0.000
0.000

0.000
0.000

1.000
0.150

1.000
0.150

1.000
0.150

CORRELATION MATRIX corrections

Stocks
Bonds
Real Estate
4
5
6
7
8
9
10
11
12
13
14

FINAL DATA & CALCULATIONS

CORRECTED RETURNS

CORRECTED VOLATILITIES

8.00%
10.00%
0.00%
0.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%

0.004
0.004
0.000
0.000
0.150
0.150
0.150
0.150
0.150
0.150
0.150
0.150
0.150

0.006
0.001
0.000
0.000
0.080
0.080
0.080
0.080
0.080
0.080
0.080
0.080
0.080

0.001
0.010
0.000
0.000
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100

0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000

0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000

0.080
0.100
0.000
0.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

0.080
0.100
0.000
0.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

0.080
0.100
0.000
0.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

1
1.00
-

2
0.30
1.00
-

3
0.25
0.15
1.00
-

1
2
3
4
5
6
7
8
9
10
11
12
13
14

5
1.00
1.00
1.00
1.00
-

6
1.00
1.00
1.00
1.00
1.00
-

7
1.00
1.00
1.00
1.00
1.00
1.00
-

8
1.00
1.00
1.00
1.00
1.00
1.00
1.00
-

1
2
3
4
5
6
7
8
9
10
11
12
13
14

1
1.00
0.30
0.25
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00

2
1.00
0.15
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00

3
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00

4
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00

5
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00

6
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00

7
1.00
1.00
1.00
1.00
1.00
1.00
1.00

8
1.00
1.00
1.00
1.00
1.00
1.00

9
-100%

10
-100%

11
-100%

12
-100%

13
-100%

14
-100%

100%

100%

100%

100%

100%

100%

100%
100%
100%
100%
100%
100%
100%
100%

100%
100%
100%
100%
100%
100%
100%
100%
100%

100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

9
-100.00%

10
-100.00%

11
-100.00%

12
-100.00%

13
-100.00%

14
-100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

1.000
0.150

1.000
0.150

1.000
0.150

1.000
0.150

1.000
0.150

1.000
0.150

0.080
0.100
0.000
0.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

0.080
0.100
0.000
0.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

0.080
0.100
0.000
0.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

0.080
0.100
0.000
0.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

0.080
0.100
0.000
0.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

0.080
0.100
0.000
0.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

9
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
-

10
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
-

11
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
-

12
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
-

13
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
-

14
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
-

9
1.00
1.00
1.00
1.00
1.00

10
1.00
1.00
1.00
1.00

11
1.00
1.00
1.00

12
1.00
1.00

13
1.00

14
-

PORTFOLIO OPTIMIZER (minimize variance)

MEAN-VARIANCE ANALYSIS
Rf =
3.00%

E[r]
6.0%
7.0%
8.0%
9.0%
10.0%

StD
SHARPE
6.63% 0.45276
6.89% 0.58063
8.60% 0.58118
11.30% 0.53079
15.00% 0.46667

Stocks
5%
16%
41%
67%
100%

Bonds Real Estate

59%
35%
48%
36%
23%
36%
0%
33%
0%
0%

4
0%
0%
0%
0%
0%

5
0%
0%
0%
0%
0%

6
0%
0%
0%
0%
0%

7
0%
0%
0%
0%
0%

8
0%
0%
0%
0%
0%

CALCULATIONS
ASSET EXP RETURNS

6.00%

7.00%

-100.00%

-100.00%

-100.00%

-100.00%

-100.00%

WEIGHTED PAIRWISE COVARIANCE MATRIX

PORTFOLIO WEIGHTS
5%
59%
5% 0.000054 0.000104
59% 0.000104 0.002245
35% 0.000065 0.000251
0%
0
0
0%
0
0
0%
0
0
0%
0
0
0%
0
0
0%
0
0
0%
0
0
0%
0
0
0%
0
0
0%
0
0
0%
0
0

35%
0.000065
0.000251
0.001252
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

TARGET RETURN
PORTFOLIO VARIANCE
PORTFOLIO STD

10.00%

6.00%
0.44%
6.63%

9
0%
0%
0%
0%
0%

10
0%
0%
0%
0%
0%

11
0%
0%
0%
0%
0%

12
0%
0%
0%
0%
0%

13
0%
0%
0%
0%
0%

14
0%
0%
0%
0%
0%

-100.00%

-100.00%

-100.00%

-100.00%

-100.00%

-100.00%

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

TTL
PORTF
0%
100%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

PORTF
MEAN
6.000%

Portfolio Optimizer with Riskless Asset (Sharpe-Maximum)

MAX SHARPE RATIO PORTFOLIO
Rf =
3%
0
E[r] =
7% IMPLIES

Rm
7.4%

StD
SHARPE
7.49% 0.59437
Sharpe
Wealth Shares:

90% IN MKT PORT AND

Stocks
27%
0.47
25%

Bonds Real Estate

37%
36%
0.38
0.40
33%
32%

10% IN RISKLESS ASSET, WITH STD =

6.7%

4
0%

5
0%

6
0%

7
0%

8
0%

CALCULATIONS
ASSET EXP RETURNS

6.00%

7.00%

-100.00%

-100.00%

-100.00%

-100.00%

-100.00%

WEIGHTED PAIRWISE COVARIANCE MATRIX

PORTFOLIO WEIGHTS
27%
37%
27% 0.00167929 0.0003637
37% 0.00036371 0.0008753
36% 0.00036573 0.0001584
0%
0
0
0%
0
0
0%
0
0
0%
0
0
0% 7.382E-011 5.330E-011
0% 7.382E-011 5.330E-011
0% 7.382E-011 5.330E-011
0% 7.382E-011 5.330E-011
0% 7.382E-011 5.330E-011
0% 7.382E-011 5.330E-011
0%
0
0

36%
0.0003657
0.0001584
0.0012744
0
0
0
0
6.431E-011
6.431E-011
6.431E-011
6.431E-011
6.431E-011
6.431E-011
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
7.38E-011
5.33E-011
6.43E-011
0
0
0
0
3.25E-018
3.25E-018
3.25E-018
3.25E-018
3.25E-018
3.25E-018
0

TARGET RETURN
PORTFOLIO VARIANCE
PORTFOLIO STD

10.00%

7.00%
0.56%
7.49%

9
0%

10
0%

11
0%

12
0%

13
0%

14
0%

-100.00%

-100.00%

-100.00%

-100.00%

-100.00%

-100.00%

0%
7.382E-011
5.330E-011
6.431E-011
0
0
0
0
3.245E-018
3.245E-018
3.245E-018
3.245E-018
3.245E-018
3.245E-018
0

0%
0%
7.382E-011 7.382E-011
5.330E-011 5.330E-011
6.431E-011 6.431E-011
0
0
0
0
0
0
0
0
3.245E-018 3.245E-018
3.245E-018 3.245E-018
3.245E-018 3.245E-018
3.245E-018 3.245E-018
3.245E-018 3.245E-018
3.245E-018 3.245E-018
0
0

0%
0%
7.382E-011 7.382E-011
5.330E-011 5.330E-011
6.431E-011 6.431E-011
0
0
0
0
0
0
0
0
3.245E-018 3.245E-018
3.245E-018 3.245E-018
3.245E-018 3.245E-018
3.245E-018 3.245E-018
3.245E-018 3.245E-018
3.245E-018 3.245E-018
0
0

TTL
PORTF
0%
100%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

PORTF
MEAN
7.450%

MEAN-VARIANCE SPACE
20%

FWD-LOOKING
MEAN-VAR FRONTIER

15%

MKT PORTF (assuming CAPM)

SML (assuming CAPM)
TARGET Er

E[r] 10%

5%

0%
0%

5%

10%

15%
VOLATILITY

20%

25%

Asset Composition of the Efficient Frontier

(based on Exhibit 21-1a expectations)
100%
90%
80%

Real Estate

70%

Bonds
Stocks

60%
50%
40%
30%
20%
10%
0%
6.0%

7.0%

8.0%
Target Return

9.0%

10.0%

HISTORICAL DATA AND STATISTICS

RETURNS
SP500
0.127

SmallStks
0.165

Bonds
0.097

REITs
0.135

Priv Real
Est
0.103

6
#DIV/0!

7
#DIV/0!

8
#DIV/0!

VOLATILITY (per time increment of data)

0.175

0.235

0.118

0.199

0.092

#DIV/0!

#DIV/0!

#DIV/0!

0.6609
1.0000

0.2721
0.0402
1.0000

0.4660
0.7638
0.2052
1.0000

0.1658
0.2100
-0.2104
0.2891
1.0000

#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

CORRELATION MATRIX
SP500
SmallStks
Bonds
REITs
Priv Real Est
6
7
8
9
10
11
12
13
14
HISTORICAL RETURNS

1.0000

HIST2 (RSP) IST2 (RLGI) IST2 (RRE)

ASSET DATE
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997

SP500
4.01%
14.31%
18.98%
-14.66%
-26.47%
37.20%
23.84%
-7.18%
6.56%
18.44%
32.42%
-4.91%
21.41%
22.51%
6.27%
32.16%
18.47%
5.23%
16.81%
31.49%
-3.17%
30.55%
7.67%
9.99%
1.31%
37.43%
23.07%
33.36%

SmallStks
-17.43%
16.50%
4.43%
-30.90%
-19.95%
52.82%
57.38%
25.38%
23.46%
43.46%
39.88%
13.88%
28.01%
39.67%
-6.67%
24.66%
6.85%
-9.30%
22.87%
10.18%
-21.56%
44.63%
23.35%
20.98%
3.11%
34.46%
17.62%
22.78%

Bonds
12.11%
13.23%
5.69%
-1.11%
4.35%
9.20%
16.76%
-0.68%
-1.18%
-1.23%
-3.95%
1.86%
40.36%
0.65%
15.48%
30.97%
24.53%
-2.71%
9.67%
18.11%
6.18%
19.30%
8.05%
18.24%
-7.77%
31.67%
-0.93%
15.85%

REITs

-42.23%
36.34%
48.97%
19.08%
-1.64%
30.53%
28.02%
8.58%
31.64%
25.47%
14.82%
5.92%
19.18%
-10.67%
11.36%
-1.81%
-17.35%
35.68%
12.18%
18.55%
0.81%
18.31%
35.75%
18.87%

Priv Real
Est
20.55%
16.09%
2.40%
6.18%
-4.45%
5.43%
25.06%
10.26%
21.01%
24.30%
15.56%
20.96%
-2.49%
14.19%
14.34%
8.16%
1.91%
4.18%
7.88%
3.31%
-5.78%
-10.63%
1.23%
12.39%
17.05%
11.49%
16.10%
19.71%

1998
1999
2000
2001
2002
2003
2004

28.58%
21.04%
-9.11%
-11.88%
-22.10%
28.70%

-7.31%
29.79%
-3.59%
22.77%
-13.28%
60.70%

13.06%
-8.96%
21.48%
3.70%
17.84%
1.45%

-18.82%
-6.48%
25.88%
15.50%
5.22%
38.47%

19.13%
5.12%
13.39%
0.83%
6.47%
15.68%
23.37%

9
#DIV/0!

10
#DIV/0!

11
#DIV/0!

12
#DIV/0!

13
#DIV/0!

14
#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!
#VALUE!

10

11

12

13

14

Forward-looking corrections
RETURNS CORRECTIONS -- additive
SmallStks
-4%

Bonds
-4%

REITs
-4%

Priv Real
Est
-3%

6
-100%

7
-100%

8
-100%

-4%

-4%

-5%

1%

100%

100%

100%

-6%

3%
-4%

-2%
-6%
-1%

8%
4%
36%
11%

100%
100%
100%
100%
100%

100%
100%
100%
100%
100%
100%

100%
100%
100%
100%
100%
100%
100%

SP500
10.00%

SmallStks
12.00%

Bonds
6.00%

REITs
10.00%

Priv Real
Est
7.00%

6
-100.00%

7
-100.00%

8
-100.00%

15.00%

20.00%

8.00%

15.00%

10.00%

100.00%

100.00%

100.00%

CORRECTED CORRELATIONS
SP500
SmallStks
Bonds
REITs
Priv Real Est
6
7
8
9
10
11
12
13
14

1.0000
0.6000
0.3000
0.4500
0.2500
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

0.6000
1.0000
0.7000
0.2500
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

0.3000
1.0000
0.2000
0.1500
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

0.4500
0.7000
0.2000
1.0000
0.4000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

0.2500
0.2500
0.1500
0.4000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

FINAL COVARIANCE MATRIX

StD
15.00%

0.150
0.023

0.200
0.018

0.080
0.004

0.150
0.010

0.100
0.004

1.000
0.150

1.000
0.150

1.000
0.150

SP500
-3%
VOLATILITY CORRECTIONS -- additive
-2%
CORRELATION MATRIX corrections
SP500
SmallStks
Bonds
REITs
Priv Real Est
6
7
8
9
10
11
12
13
14

FINAL DATA & CALCULATIONS

CORRECTED RETURNS

CORRECTED VOLATILITIES

20.00%
8.00%
15.00%
10.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%

0.018
0.004
0.010
0.004
0.150
0.150
0.150
0.150
0.150
0.150
0.150
0.150
0.150

0.040
0.000
0.021
0.005
0.200
0.200
0.200
0.200
0.200
0.200
0.200
0.200
0.200

0.000
0.006
0.002
0.001
0.080
0.080
0.080
0.080
0.080
0.080
0.080
0.080
0.080

0.021
0.002
0.023
0.006
0.150
0.150
0.150
0.150
0.150
0.150
0.150
0.150
0.150

0.005
0.001
0.006
0.010
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100
0.100

0.200
0.080
0.150
0.100
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

0.200
0.080
0.150
0.100
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

0.200
0.080
0.150
0.100
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

1
2
3
4
5
6
7
8
9
10
11
12
13
14

1
1.00
-

2
0.60
1.00
-

3
0.30
1.00
-

4
0.45
0.70
0.20
1.00
-

5
0.25
0.25
0.15
0.40
1.00
-

6
1.00
1.00
1.00
1.00
1.00
-

7
1.00
1.00
1.00
1.00
1.00
1.00
-

8
1.00
1.00
1.00
1.00
1.00
1.00
1.00
-

1
2
3
4
5
6
7
8
9
10
11
12
13
14

1
1.00
0.60
0.30
0.45
0.25
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00

2
1.00
0.70
0.25
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00

3
1.00
0.20
0.15
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00

4
1.00
0.40
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00

5
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00

6
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00

7
1.00
1.00
1.00
1.00
1.00
1.00
1.00

8
1.00
1.00
1.00
1.00
1.00
1.00

9
-100%

10
-100%

11
-100%

12
-100%

13
-100%

14
-100%

100%

100%

100%

100%

100%

100%

100%
100%
100%
100%
100%
100%
100%
100%

100%
100%
100%
100%
100%
100%
100%
100%
100%

100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

9
-100.00%

10
-100.00%

11
-100.00%

12
-100.00%

13
-100.00%

14
-100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000
1.0000

1.000
0.150

1.000
0.150

1.000
0.150

1.000
0.150

1.000
0.150

1.000
0.150

0.200
0.080
0.150
0.100
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

0.200
0.080
0.150
0.100
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

0.200
0.080
0.150
0.100
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

0.200
0.080
0.150
0.100
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

0.200
0.080
0.150
0.100
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

0.200
0.080
0.150
0.100
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

9
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
-

10
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
-

11
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
-

12
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
-

13
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
-

14
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
-

9
1.00
1.00
1.00
1.00
1.00

10
1.00
1.00
1.00
1.00

11
1.00
1.00
1.00

12
1.00
1.00

13
1.00

14
-

PORTFOLIO OPTIMIZER (minimize variance)

MEAN-VARIANCE ANALYSIS
Rf =
3.00%

E[r]
6.7%
8.0%
9.4%
10.7%
12.0%

StD
SHARPE
6.55% 0.56843
7.87% 0.64106
10.73% 0.59284
14.30% 0.53713
20.00% 0.45000

SP500
0%
13%
28%
37%
0%

SmallStks
7%
16%
21%
34%
100%

Bonds
61%
38%
13%
0%
0%

REITs
0%
8%
21%
29%
0%

Priv Real
Est
32%
25%
17%
0%
0%

6
0%
0%
0%
0%
0%

7
0%
0%
0%
0%
0%

8
0%
0%
0%
0%
0%

10.00%

12.00%

6.00%

10.00%

7.00%

-100.00%

-100.00%

-100.00%

0%
29%
0 0.0010834
0 0.0020629
0
0
0 0.0018717
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

CALCULATIONS
ASSET EXP RETURNS

WEIGHTED PAIRWISE COVARIANCE MATRIX

PORTFOLIO WEIGHTS
37%
34%
37% 0.0030968 0.0022744
34% 0.0022744 0.0046399
0%
0
0
29% 0.0010834 0.0020629
0%
0
0
0%
0
0
0%
0
0
0%
0
0
0%
0
0
0%
0
0
0%
0
0
0%
0
0
0%
0
0
0%
0
0
TARGET RETURN
PORTFOLIO VARIANCE
PORTFOLIO STD

10.68%
2.04%
14.30%

9
0%
0%
0%
0%
0%

10
0%
0%
0%
0%
0%

11
0%
0%
0%
0%
0%

12
0%
0%
0%
0%
0%

13
0%
0%
0%
0%
0%

14
0%
0%
0%
0%
0%

-100.00%

-100.00%

-100.00%

-100.00%

-100.00%

-100.00%

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

TTL
PORTF
0%
100%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

PORTF
MEAN
10.681%

Portfolio Optimizer with Riskless Asset (Sharpe-Maximum)

MAX SHARPE RATIO PORTFOLIO
Rf =
3%
0
E[r] =
7% IMPLIES

Rm
7.8%

StD
SHARPE
7.52% 0.64275
Sharpe
Wealth Shares:

83% IN MKT PORT AND

17% IN RISKLESS ASSET, WITH STD =

SP500
10%
0.47
9%

SmallStks
15%
0.45
13%

Bonds
42%
0.38
34%

REITs
6%
0.47
5%

Priv Real
Est
27%
0.40
22%

10.00%

12.00%

6.00%

10.00%

42%
6%
0.0001573 6.378E-005
0 0.0001907
0.0011121 6.011E-005
6.011E-005 8.122E-005
0.0001336 9.627E-005
0
0
0
0
6.007E-011 1.623E-011
6.007E-011 1.623E-011
6.007E-011 1.623E-011
6.007E-011 1.623E-011
6.007E-011 1.623E-011
6.007E-011 1.623E-011
0
0

6.2%

6
0%

7
0%

8
0%

7.00%

-100.00%

-100.00%

-100.00%

27%
0.000105
0.0002018
0.0001336
9.627E-005
0.0007132
0
0
4.811E-011
4.811E-011
4.811E-011
4.811E-011
4.811E-011
4.811E-011
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

0%
2.83E-011
5.45E-011
6.01E-011
1.62E-011
4.81E-011
0
0
3.25E-018
3.25E-018
3.25E-018
3.25E-018
3.25E-018
3.25E-018
0

CALCULATIONS
ASSET EXP RETURNS

WEIGHTED PAIRWISE COVARIANCE MATRIX

PORTFOLIO WEIGHTS
10%
15%
10% 0.0002474 0.0002853
15% 0.0002853 0.000914
42% 0.0001573
0
6% 6.378E-005 0.0001907
27% 0.000105 0.0002018
0%
0
0
0%
0
0
0% 2.833E-011 5.446E-011
0% 2.833E-011 5.446E-011
0% 2.833E-011 5.446E-011
0% 2.833E-011 5.446E-011
0% 2.833E-011 5.446E-011
0% 2.833E-011 5.446E-011
0%
0
0
TARGET RETURN
PORTFOLIO VARIANCE
PORTFOLIO STD

7.00%
0.57%
7.52%

9
0%

10
0%

11
0%

12
0%

13
0%

14
0%

-100.00%

-100.00%

-100.00%

-100.00%

-100.00%

-100.00%

0%
2.833E-011
5.446E-011
6.007E-011
1.623E-011
4.811E-011
0
0
3.245E-018
3.245E-018
3.245E-018
3.245E-018
3.245E-018
3.245E-018
0

0%
0%
2.833E-011 2.833E-011
5.446E-011 5.446E-011
6.007E-011 6.007E-011
1.623E-011 1.623E-011
4.811E-011 4.811E-011
0
0
0
0
3.245E-018 3.245E-018
3.245E-018 3.245E-018
3.245E-018 3.245E-018
3.245E-018 3.245E-018
3.245E-018 3.245E-018
3.245E-018 3.245E-018
0
0

0%
0%
2.833E-011 2.833E-011
5.446E-011 5.446E-011
6.007E-011 6.007E-011
1.623E-011 1.623E-011
4.811E-011 4.811E-011
0
0
0
0
3.245E-018 3.245E-018
3.245E-018 3.245E-018
3.245E-018 3.245E-018
3.245E-018 3.245E-018
3.245E-018 3.245E-018
3.245E-018 3.245E-018
0
0

100%

TTL
PORTF
0%
100%
0
0
0
0
0
0
0
0
0
0
0
0
0
0

PORTF
MEAN
7.834%

MEAN-VARIANCE SPACE
20%

FWD-LOOKING
MEAN-VAR FRONTIER

15%

MKT PORTF (assuming CAPM)

SML (assuming CAPM)
TARGET Er

E[r] 10%

5%

0%
0%

5%

10%

15%
VOLATILITY

20%

25%

Portfolio Composition
100%
14
13

90%

12
11

80%

10
9
8

70%

7
6

60%

Priv Real Est

REITs

50%

Bonds
SmallStks

40%

SP500

30%

20%

10%

0%
6.7%

8.0%

9.4%
Target Return

10.7%

12.0%