Summary

This chapter is a natural extension of the hypothetical applications in Chapter 6. Here, we begin with actual historical returns series on 10 firms. Estimating mean returns, covariances, and volatilities, we constructed three portfolios: (1) The minimum risk portfolio located at the left-most point on the efficient set (technically uncorrelated with the market portfolio), the (2) set of minimum risk portfolios lying on the efficient set, and (3) the restricted no-shorts portfolio. We have conducted risk attribution analysis, estimated betas, correlations, the Sharpe ratio, derived the security market line, and discussed the implications of the capital asset pricing model. We also introduced the concept of the benchmark portfolio and how we assess portfolio performance in the presence of an alternative passive benchmark. We return to this concept fully in Chapter 10, on active management. Finally, we demonstrated the impact of alternate returns frequencies on portfolio allocation and performance.