Optimal Portfolio Selection: A Note with a VBA Solution
16 Pages Posted: 15 Oct 2012 Last revised: 29 Oct 2012
Date Written: October 14, 2012
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: Suggested Citation