Optimal Portfolio Selection: A Note with a VBA Solution

16 Pages Posted: 15 Oct 2012 Last revised: 29 Oct 2012

See all articles by Ignacio Velez-Pareja

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Pedro Fabián Castilla Ávila

Grupo Consultor CAV Capital Advisory & Valuation

Date Written: October 14, 2012

Abstract

Usually in financial textbooks and courses the theory of portfolio selection is taught in a strictly theoretical way. There is a model (Markowitz) that stipulates that an investor has preferences and that she will choose the best portfolio, given her preference curves and an efficient frontier. On the other hand, the Capital Asset Pricing Model (CAPM) is presented as it is: a genial idea that served to simplify and to make operative the Markowitz setup.

Most students and practitioners conclude that those models are just inapplicable theory. This is the most rational behavior one can expect. What can an investor do with the textbook recipes to configure an optimal portfolio? Very little. We show through an example how the portfolio is obtained “manually” and how to use the add-in developed showing the efficient frontier in the example.

Keywords: CAPM, efficient frontier, portfolio selection, capital market line, optimal portfolio, add-in, VBA

JEL Classification: G11, G12

Suggested Citation

Velez-Pareja, Ignacio and Castilla Ávila, Pedro Fabián, Optimal Portfolio Selection: A Note with a VBA Solution (October 14, 2012). Available at SSRN: https://ssrn.com/abstract=2161479 or http://dx.doi.org/10.2139/ssrn.2161479

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

Pedro Fabián Castilla Ávila (Contact Author)

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Cartagena
Cartagena
Colombia
3017247079 (Phone)

HOME PAGE: http://www.grupoconsultorcav.com.co

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