Efficient Frontier for average U.S. Investor Group1
Text Box: rf=8.55 rc = yrp+(1-y)rf A=E(rp)-rf/.01ys2p E(rp) = y(.01As2p)+rf sc = ysp The weights of the original risky portfolio will stay the same because when combined with the fisk free investment the optimal combined portfolio will still stay on the same CAM. For this reason on will take y, the amount invested in a risky portfolio and then multiply that number by the weights in the risky portfolio. The risk in the original portfolio will not change. Roberto have a much higher risk aversion coefficient of 4.3 than does Cathy A=.5 who has a low risk aversion and therefore is willing to invest in a much higher proportion of risky portfolio.
Indexes Returns (%) S.D. (%)
Risk free 8.6 0.9
Russell 2000 (RUS) 15.8 4.4
S&P 500 (S&P) 17.6 3.4
LB Bond (LBB) 13.3 3.8
EAFE (EAFE) 22.2 5.6
Correlation Matrix
  RUS S&P LBB EAFE
RUS 1.000 0.061 0.013 0.032
S&P 0.061 1.000 0.021 0.032
LBB 0.013 0.021 1.000 0.014
EAFE 0.032 0.032 0.014 1.000
   Covariance Matrix
  RUS S&P LBB EAFE
RUS 19.591 0.920 0.228 0.781
S&P 0.920 11.622 0.272 0.615
LBB 0.228 0.272 14.609 0.299
EAFE 0.781 0.615 0.299 31.190
Sum of  Portfolio Variance
rp Weights Port Mean Port wgts. Diag Off-Diag Total $ amount = 1,000,000
Target Port Mean St. Dev RUS S&P LBB EAFE y E(rc) Sc A Tbill RUS S&P LBB EAFE
14.5 2.6 0.20 0.28 0.58 -0.06 14.50 1.00 6.738638 0.183817 6.922455 0.1 9.1 0.3 85.9
15.3 2.4 0.13 0.37 0.50 0.00 15.30 1.00 5.53098 0.219824 5.750803 0.2 9.9 0.5 29.3
16.2 2.3 0.04 0.47 0.41 0.08 16.20 1.00 5.256356 0.217494 5.47385 0.3 10.8 0.7 15.5
17.3 2.6 -0.07 0.60 0.29 0.18 17.30 1.00 6.482136 0.152821 6.634956 y=.5 0.4 12.1 1.0 8.2
18.3 3.0 -0.17 0.71 0.19 0.26 18.30 1.00 9.084662 0.0352 9.119862 Roberto : 0.5 13.4 1.5 4.3 500,000 (82,761) 354,948 96,698 131,116
19.2 3.5 -0.25 0.81 0.10 0.34 19.20 1.00 12.63929 -0.11861 12.52069 0.6 14.9 2.1 2.4
20.4 4.3 -0.37 0.94 -0.02 0.44 20.40 1.00 19.16545 -0.39434 18.7711 0.7 16.8 3.0 1.3
21.6 5.2 -0.49 1.08 -0.14 0.55 21.60 1.00 27.73346 -0.75083 26.98263 y=.9 0.8 19.0 4.2 0.8
22.9 6.2 -0.61 1.22 -0.27 0.66 22.90 1.00 39.31968 -1.22816 38.09153 Cathy :  0.9 21.5 5.6 0.5 100,000 (550,475) 612,290 (135,333) 328,862
24.1 7.1 -0.73 1.36 -0.39 0.76 24.10 1.00 52.14159 -1.75288 50.38871 1 24.1 7.1 0.3