Ideas and suggestion about specific portfolios, lying on the efficient frontier (Study Session 18)

Does anybody know where I could find ideas and suggestion about specific real-life portfolios, lying on the efficient frontier (Study Session 18). For example, where I could find the following set of data: -Security X - weight w1(%) -Security Y - weight w2(%) -Expected return - ##(%) -Standard deviation of the return - ##(%) … (etc.) Is there any software packages which would allow to complete this task, after user selects the securities which wants to include in portfolio? Thank you all in advance for your suggestions.

“Is there any software packages which would allow to complete this task, after user selects the securities which wants to include in portfolio?” Microsoft Excel.

I’m sure there exists some efficient frontier package for Excel and it would be a fun project to write one, but you can’t use it right out of the box for generating an efficient frontier (but Solver could be a big help). Russian - There are oodles of software packages that will give you an efficient frontier given a set of expected returns and std. devs… It’s a problem in quadratic programming that is not very hard to program, especially with help like Solver, Mathematic, MatLab (the latter two probably have routines in something like the optional finance packages).

Another question related to this… How would you find where a person’s indifference curves are, or at least where the ideal spot on the efficient frontier is for an individual?

Lol, forgot that my Excel is different from most…mea culpa Russian, sorry for the smart aleck response, although in my defense I did install this add-in years ago… Anyways, google this: “efficient frontier, excel add-in” and you get numerous hits. Looking at them they don’t cost very much money (although I’m sure that your company would pay for it anyway. Hope this helps.

Dimes27 Wrote: ------------------------------------------------------- > Another question related to this… How would you > find where a person’s indifference curves are, or > at least where the ideal spot on the efficient > frontier is for an individual? I guess a more fundamental question would be - do you believe that there is anything stable about a person’s indifference curve so that finding it would be any help? If so, you ought to be able to ask people questions about ‘do you prefer portfolio A or portfolio B?’ and ask enough questions like that and you should be able to get an indifference curve. I’ll bet in practice it’s much more muddy.

In terms of their indifference curve(s), the main issue is quantifying their various risk aversions (pretty easy, although a pain in the ass - ten questions per person should give you a reasonable ground to stand on) and their sensitivity to change with varying market forces and/or states (this part is virtually impossible, although if you do it I’d be duly impressed). Once you can do this the rest pretty much falls into place.* *Can’t emphasize enough how difficult I believe it would be to model the derivative of a risk aversion curve. That being said, good luck to you.

skillionaire Wrote: > Anyways, google this: “efficient frontier, excel > add-in” and you get numerous hits. Looking at > them they don’t cost very much money (although I’m > sure that your company would pay for it anyway. I’d also highly suggest googling RExcel, an excellent add-in.

I think an investors indifference curve would change with varying degrees of wealth, market conditions, or maybe personality changes… but within a reasonably isolated environment I don’t see why it wouldn’t be relatively stable. I guess market conditions would be the biggest obstacle? But is it really risk-aversiveness that is changing, or the expected return on investments? The cheap shortcut/estimate that I’m thinking about would be to goalseek a portfolio that maximized a certain asset allocation… say 60/30/10 equities, bonds, cash (made up numbers)… which might correspond to a moderate aggressive investor, msnmoney/yahoo finance both do these kinds of generic risk assessments. Then with all the return/stdev information goalseek a return optimizing portfolio that fits those constraints, so that level of risk aversion is incorporated through the constraints. That might give enough info to even find the indifference curves (?), though the ideal point on the efficient frontier seems like the more important result.