Portfolio Selection

This command creates a model for the problem of selecting an optimum mix of equities in an investment portfolio. In this problem, a set of alternative financial securities is available for inclusion in a portfolio. Each is characterized by an expected return and risk measured by the variance of the return. The returns of the future are random variables with distributions based on the mean, variance and correlation matrix. Three different assumptions are accommodated by the model:

• the returns are independent random variables
• the returns are correlated random variables with the correlation matrix given by the analyst
• the mean and standard deviations of the returns and the correlation matrix are estimated by data included directly on the worksheet.

This is often called the Markowitz portfolio model since Harry Markowitz recognized the importance of correlation to portfolio selection.

Relink Buttons

This command is necessary when working with a worksheet created by another computer. It creates new buttons that are linked to the active add-in. If the buttons on a worksheet do not work or result in an error message, click this botton. It causes the buttons on the worksheet to be erased and new buttons created.

The Math Programming add-in constructs the math programming model and the Solver add-in solves the model, so those two add-ins must be installed in addition to the Equity add-in. Before attempting to create a model, choose the Solver command from the Tools menu. This opens the Solver dialog. Then immediately close the dialog. This establishes contact with the Solver. This step must be performed every time Excel is launched.