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The Journal of Wealth Management

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Primary Article

Modern Portfolio Optimization

A Practical Approach Using an Excel Solver Single-Index Model

Jeff Grover and Angeline M. Lavin
The Journal of Wealth Management Summer 2007, 10 (1) 60-72; DOI: https://doi.org/10.3905/jwm.2007.684880
Jeff Grover
An associate professor at Indiana Wesleyan University in Marion, IN.
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  • For correspondence: jeff.grover@indwes.edu
Angeline M. Lavin
An associate professor at Beacom School of Business, University of South Dakota in Vermillion, SD.
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  • For correspondence: angeline.lavin@usd.edu
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Abstract

Modern investors face a daunting challenge when attempting to determine how to efficiently optimize their portfolios. Often these investors do not have access to portfolio optimization tools or the background to understand mathematical models that provide insight into efficient portfolio management. While Modern Portfolio Theory (MPT) provides excellent insights into which assets should be included in an investor's optimal portfolio, understanding the underlying statistical techniques in portfolio optimization presents a rigorous challenge. Even the simplest of methods requires a substantial knowledge of statistical concepts. The investor's knowledge of the theoretical basis of MPT presents a conceptual constraint on his/her ability to understand these required underlying constructs in determining which asset investment strategy will optimize his/her portfolio. This article presents a practical solution to the strategic asset allocation problem that investors face when attempting to construct an optimal portfolio from a given set of available mutual funds. The optimization model, developed in Excel, uses capital asset pricing model (CAPM) principles to determine security (fund) valuation and the Sharpe Ratio to identify an optimal or efficient combination of the available funds.

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The Journal of Wealth Management
Vol. 10, Issue 1
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Modern Portfolio Optimization
Jeff Grover, Angeline M. Lavin
The Journal of Wealth Management Apr 2007, 10 (1) 60-72; DOI: 10.3905/jwm.2007.684880

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Modern Portfolio Optimization
Jeff Grover, Angeline M. Lavin
The Journal of Wealth Management Apr 2007, 10 (1) 60-72; DOI: 10.3905/jwm.2007.684880
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