In the Third Quarter 2011 issue of Computerized Investing, I began a discussion of how investors can use a spreadsheet program to maximize the risk-return makeup of a two-stock portfolio. This oversimplified example allowed us to walk through several functions of Excel to calculate the correlation and covariance between investments—the degree to which returns move in the same direction (or not)—and the standard deviation, or volatility, of individual assets and the portfolio as a whole. The article culminated in using the Solver module in Excel to arrive at the weights invested in each stock in order to minimize the overall portfolio risk (minimize the standard deviation).
Obviously, few investors hold only two stocks or securities. For this article, I will expand on the previous article’s concepts to show you how you can use Excel to construct a multi-asset investment portfolio that achieves the goal of either minimizing risk or maximizing return.
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