In: Finance
How do you find the optimal weights of a portfolio in excel using solver given a predefined risk (target standard deviation)?
Step 1
Firstly calculate the expected return of the portfolio
Snap for reference with dummy data attached
- To start, the weights for all the assets in the portfolio is kept the same, 20%
Excel function used: MMULT - Matrix Multiplier - Returns the matrix product of 2 arrays.
I10:I14 is the column containing the weights of the assets and B2:B6 is the expected return for each of the asset.
Step 2
Calculate the standard deviation
Step 3
Calculate the Shape Ratio - (Expected Rate - Risk Free Rate/12)/stdev
Assuming Rf = 1.5%
Step 4
Select the solver
Select Sharpe Ratio as the objective function
Select Portfolio Weights as the inputs
Condition - Sum of the portfolio weights should be equal to 1.
Run