A Simple Approach To Determining The Super-Efficient Investment Portfolio

Abstract

This paper presents a simple approach to Modern Portfolio Theory that makes the process more understandable and accessible to students. The methodology is a five-step process that begins with the calculation of mean returns, excess returns, betas, unsystematic risk, and excess returns over beta and then systematically ranks a set of funds to determine a supper-efficient optimal portfolio. Data from the TIAA-CREF family of funds was employed in this study but the analysis can be applied to any distinct set of mutual funds. This linear optimization methodology, based on the Elton, Gruber, Brown, and Goetzmann (2003) methodology, is a straightforward tool that can be used to teach students the underlying constructs of modern portfolio theory because it enables the students to learn by performing the analysis themselves. This research will also benefit mutual fund investors because it can be widely applied to help investors make better asset allocation decisions.