Ten Basic Steps...

Win O R S, Efficient Set from Your Equity Portfolio…

Step One: Start Win O R S.   Additionally, open a Microsoft Word document. If this is the first Word document for this assignment, then start Word by use of the Windows Start menu.  If you have previously created a Word document then you must open the document by using the following Win O R S menu tree:. Solution.. Open M-S Word document…

Step Two. There are several way to compute and view an efficient set. The basic discussion focuses on the use of Equity Portfolio and its defined ticker symbols (securities).  Open your WinORS data file that contains the Equity Portfolio on spreadsheet tab A.

Step Three.  Choose the menu sequence:. Applications.  Finance Methods.  Portfolio Management.  Efficient Portfolios. If this the first time you have created an efficient set, then you will see the Portfolio Model Selection menu appear next.  The default entries on the menu are preset for effective first time use. Click on Go Solve.

Step Four. WinORS will automatically connect to the Internet and download historical prices for each security listed in the Equity Portfolio. Period returns are calculated and then inserted into the spreadsheet.  WinORS automatically adds the S&P 500 index data for the calculation of equity beta coefficients.  When WinORS has completed this task you will see the Portfolio Solution Range dialog box on screen. Again, the default entries have been optimized for your use.  Click on OK.

Step Five. After a short computation, WinORS displays the efficient set in a graph window.  For reference, each individual security is also displayed on the same graph.  Of course, the point here is to demonstrate the effect of correlation on the diversification process. That is, efficient combinations of securities always have lower risk in a given expected return class than any individual security.

Step Six.  Please turn your attention to the spreadsheet. Note that a new tab has been inserted. The Markowitz tab presents the portfolio composition of each corner portfolio on the efficient frontier. A portfolio that lies between two corner portfolios is known as an intermediate portfolio.  Because intermediate portfolios are linear combinations of adjacent corner portfolios they are now shown as distinct points.  Alternatively, it is said that each corner portfolio represents a unique risk-return relationship.

Step Seven.  On the Markowitz tab, corner portfolios are presented by column. In column B is the first efficient portfolio. This is a unique portfolio that is known as the maximum rate of return portfolio (MRP).  It is unique in that this is always a one (1) stock portfolio. It contains the stock with the highest return-risk combination.  The last efficient portfolio is also a unique portfolio.  It is referred to as the minimum variance portfolio (MVP). This portfolio presents the combination of securities that produces the smallest possible risk coefficient.  After the presentation of the last security, the expected return row is presented followed by the portfolio risk. Individual security characteristics follow the MVP.  The security beta is the traditional unadjusted beta while the V_Beta is the Vasicek Bayesian adjusted beta.

Step Eight.  It is possible to paste one of the efficient portfolios onto the Equity Portfolio spreadsheet. You would do this to provide a benchmark by which to compare the performance of your managed portfolio. Begin by inspecting the Markowitz efficient portfolios.  Choose one that you want to use as a benchmark. For example, assume the efficient portfolio in Column C is the desired optimal benchmark.

Step Nine: Execute the menu tree: /Data / Create Portfolio From / Efficient Frontier. The Efficient Set Reference Portfolio dialog box appears.  Use the iterator until C appears in the box.  This means that the data in Column C will be pasted.  Click OK. The security percentages in column C are automatically pasted to column AB on the Equity Portfolio spreadsheet.  After performing a price update, the optimal portfolio will be adjusted by number of shares to be approximately equal to the managed portfolio.  This permits easy dollar-change comparisons to be made over future updates.

Step Ten:  Save, edit, and close all documents and applications.

This completes the ten basic steps for Equity Portfolio...

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