Markowitz Portfolio Analysis: The Demonstration Portfolio Problem
Abstract
When introducing students to modern portfolio analysis, the most impressive example of diversification benefits comes when the portfolio standard deviation and coefficient of variation are lower than those of either of the two equally weighted assets contained in the portfolio. Randomly selected values for portfolio inputs will not always result in the most impressive portfolio outcome. This article derives the correlation coefficient necessary to produce an equally weighted two-asset portfolio that dominates either of the two individual assets in terms of standard deviation and coefficient of variation. Spreadsheet models based on these derivations are provided to assist finance educators in setting the necessary portfolio input values. The information in this article is most useful for educators who generate their own homework/quiz/test problems.
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