The critical line method for mean-variance portfolio selection, developed by Harry Markowitz over a half a century ago, is an important analytical tool for modern portfolio management. The method in its original form is a sophisticated algorithm for portfolio optimization under general linear constraints. Therefore, a challenge for instructors of investment courses is how to explain the method to business students who are unfamiliar with advanced mathematical and programming tools. This study illustrates pedagogically that, under practically relevant constraints including investment limits on individual securities and disallowance of short sales, the method can still be covered in investment courses where only general algebraic skills and statistical concepts are required. The use of electronic spreadsheets for portfolio construction not only significantly reduces the computational burden, but also makes the analytical materials involved less abstract for business students. This study, which provides spreadsheet-based illustrations of the required computations, is intended to make the Markowitz analysis more accessible to business students.
Kwan, Clarence C.
A Simple Spreadsheet-Based Exposition of the Markowitz Critical Line Method for Portfolio Selection,
Spreadsheets in Education (eJSiE):
3, Article 2.
Available at: http://epublications.bond.edu.au/ejsie/vol2/iss3/2