# Harry Markowitz received the 1990 Nobel Prize for his path-breaking work in portfolio optimization. One version of

## Question:

Harry Markowitz received the 1990 Nobel Prize for his path-breaking work in portfolio optimization. One version of the Markowitz model is based on minimizing the variance of the portfolio subject to a constraint on return. We use the data and notation developed for the Hauck Index Fund in Section 12.4 to develop an example of the Markowitz mean-variance model. If each of the scenarios is equally likely and occurs with probability 1/5, then the mean return or expected return of the portfolio is

The variance of the portfolio return is

See Section 2 in Chapter 3 for a review of the mean and variance concept. Using the scenario return data given in Table 12.2, formulate the Markowitz mean-variance model. The objective function is the variance of the portfolio and should be minimized. Assume that the required return on the portfolio is 10%. There is also a unity constraint that all of the money must be invested in mutual funds. Solve this mean-variance model using either LINGO or Excelsolver.

Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...
Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
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