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E-V Exmaple

Data
X1
Event 1
Event 2
Event 3
Event 4
Event 5
Event 6
Event 7
Event 8
Event 9
Event 10
Mean
Max
Min

X2
7
8
4
5
6
3
2
5
4
3
4.7
8
2

X3
6
4
8
9
7
10
12
4
7
9
7.6
12
4

X4
8
16
14
-2
13
11
-2
18
12
-5
8.3
18
-5

<Tools-Data Analysis-Covariance>
X1
X2
X3
X1
3.21
X2
-3.52
5.84
X3
6.99
-13.68
61.81
X4
0.04
0.12
-1.64
S Matrix: "Variance-Covariance Matrix"
X1
X2
X3
X1
3.21
-3.52
6.99
X2
-3.52
5.84
-13.68
X3
6.99
-13.68
61.81
X4
0.04
0.12
-1.64

5
6
6
7
6
5
6
6
5
6
5.8
7
5

LP Model
Variables to manipulate
Decision Variables
Objective to Maximize
Expected Value
Risk component
Avalable Funds
Solution
RAP
Buy Stock1 (X1)
Buy Stock2 (X2)
Buy Stock3 (X3)
Buy Stock4 (X4)
Obj
Mean
Variance
Standard Deviate
Shadow Price

0.000
X1
4.7
22

0.00100
0.000
7.355
9.977
0.000
134.245
138.705
4460.478
66.787

X4
Matrix Multiplication
X'S

43.8470931

0.36

X4
0.04
0.12
-1.64
0.36

0
7.35509438
9.97668459
0

X'SX

4460.47805

7.355
X2

9.977
X3

0.000
X4

7.6

8.3

5.8

30

28

26

-93.527294 516.041184 -15.479151

X' Matrix
Sum
RHS Limit
134.245
138.705
4.460
500
500

E-V Exmaple
Step 1: Get Data
X1
Event 1
Event 2
Event 3
Event 4
Event 5
Event 6
Event 7
Event 8
Event 9
Event 10

X2
7
8
4
5
6
3
2
5
4
3

X3
6
4
8
9
7
10
12
4
7
9

X4
8
16
14
-2
13
11
-2
18
12
-5

5
6
6
7
6
5
6
6
5
6

We have 10 observations of
stock return for 4 stocks

4 Stocks
Step 2: Calculate Statistics
Mean
Max
Min

4.7
8
2

7.6
12
4

8.3
18
-5

5.8 =AVERAGE(E5:E14)
7 =MAX(E5:E14)
5 =MIN(E5:E14)

Step 3: Calculate Variance-Covariance matrix of stock returns by Excel Command


X1
X2
X3
X4
X1
3.21
<Tools-Data Analysis-Covariance>
X2
-3.52
5.84
X3
6.99
-13.68
61.81
X4
0.04
0.12
-1.64
0.36

Step 4: Make "S Matrix" (Use symmetry condition of "Variance-Covariance Matrix")


X1
X2
X3
X4
X1
3.21
-3.52
6.99
0.04 =B39
X2
-3.52
5.84
-13.68
0.12 =C39
X3
6.99
-13.68
61.81
-1.64 =D39
X4
0.04
0.12
-1.64
0.36

Step 5: Make a LP Model


Variables to manipulate
Decision Variables
E-V Objective to Maximize
Expected Value
RAP * Variance
Avalable Funds

4.405
X1

8.188
X2

1.753
X3

4.168
X4

4.7

7.6

8.3

5.8

22

30

28

26

Sum
116.805
121.656
4.851
500

RAP

0.05

Step 6: Compute variance using Matrix Multiplication X'SX


X'S

(1X4 Matrix)
-2.259473 8.8280077 20.306058 -0.215722 {=MMULT(G45:J45,B36:E39)}

(4X1 Matrix)
4.4050231
8.1875743
1.7530661
4.1683235

X'SX

{=TRANSPOSE(G45:J45)}

(1X1 Matrkx)
97.025603

Step 7: Solve the LP problem with one RAP

Step 8: Summarize and save the solution and Try another RAP
RAP
Buy Stock1 (X1)
Buy Stock2 (X2)
Buy Stock3 (X3)
Buy Stock4 (X4)
Obj
Mean
Variance
Standard Deviation
Shadow Price

0.05000
4.405
8.188
1.753
4.168
116.805
121.656
97.026
9.850
0.224

=K51
=G45
=H45
=I45
=J45
=K47
=K48
=B66
=G79^0.5
='Sensitivity Report 1'!E17

Copy solutions and <Paste Special-Value>


Solutions for Alternative Risk Aversion Parameters
RAP
0.00000
0.00025
0.00050
0.00075
Buy Stock1 (X1)
0.000
0.000
0.000
0.000
Buy Stock2 (X2)
0.000
0.000
1.263
5.324
Buy Stock3 (X3)
17.857
17.857
16.504
12.152
Buy Stock4 (X4)
0.000
0.000
0.000
0.000
Obj
148.214
143.287
138.444
135.688
Mean
148.214
148.214
146.581
141.331
Variance
1.971E+04 1.971E+04 1.627E+04 7.523E+03
Standard Deviation
140.392
140.392
127.573
86.738
Shadow Price
0.296
0.277
0.261
0.260

{=MMULT(B57:E57,B60:B63)}

<Tools-Solver>

e have 10 observations of
ock return for 4 stocks

ta Analysis-Covariance>

X' Matrix
RHS Limit
=L48-L49
=$H$45*H48+$I$45*I48+$J$45*J48+$K$45*K48
=L51*B52
500
Change RAP

Change RAP

G45:J45,B36:E39)}
Use "Array function"
1) Click and drag area
2) Type command (=mmult( , )
3) Ctrl - Shift - Enter

OSE(G45:J45)}

B57:E57,B60:B63)}

0.05000
4.405
8.188
1.753
4.168
116.805
121.656
97.026
9.850
0.224

Microsoft Excel 10.0 Sensitivity Report


Worksheet: [E-V Example.xls]Step-by-Step
Report Created: 01/25/2004 9:59:54 PM

Adjustable Cells
Cell
$G$45
$H$45
$I$45
$J$45

Name
Variables to manipulate
Variables to manipulate
Variables to manipulate
Variables to manipulate

Final
Value
4.405
8.188
1.753
4.168

Reduced
Gradient
0.000
0.000
0.000
0.000

Constraints
Cell
Name
$K$50 Avalable Funds Sum

Final Lagrange
Value Multiplier
500 0.223906565

Microsoft Excel 10.0 Sensitivity Report


Worksheet: [E-V Example.xls]Step-by-Step
Report Created: 01/25/2004 9:58:48 PM

Adjustable Cells
Cell
$G$45
$H$45
$I$45
$J$45

Final
Name
Value
Variables to manipulate 0.000
Variables to manipulate 5.324
Variables to manipulate 12.152
Variables to manipulate 0.000

Reduced
Gradient
-1.121
0.000
0.000
-0.933

Constraints
Cell
Name
$K$50 Avalable Funds Sum

Final
Lagrange
Value
Multiplier
500 0.260090876

Microsoft Excel 10.0 Sensitivity Report


Worksheet: [E-V Example.xls]Step-by-Step
Report Created: 01/25/2004 9:54:46 PM

Adjustable Cells
Cell
$G$45
$H$45
$I$45
$J$45

Final
Name
Value
Variables to manipulate 0.000
Variables to manipulate 0.000
Variables to manipulate 17.857
Variables to manipulate 0.000

Reduced
Gradient
-1.450
-0.579
0.000
-1.380

Constraints
Cell
Name
$K$50 Avalable Funds Sum

Final
Lagrange
Value
Multiplier
500 0.276718736

Microsoft Excel 10.0 Sensitivity Report


Worksheet: [E-V Example.xls]Step-by-Step
Report Created: 01/25/2004 9:57:45 PM

Adjustable Cells
Cell
$G$45
$H$45
$I$45
$J$45

Final
Name
Value
Variables to manipulate 0.000
Variables to manipulate 1.263
Variables to manipulate 16.504
Variables to manipulate 0.000

Reduced
Gradient
-1.144
0.000
0.000
-0.949

Constraints
Cell
Name
$K$50 Avalable Funds Sum

Final
Lagrange
Value
Multiplier
500 0.260613237

Microsoft Excel 10.0 Sensitivity Report


Worksheet: [E-V Example.xls]Step-by-Step
Report Created: 01/25/2004 9:45:52 PM

Adjustable Cells
Cell
$G$45
$H$45
$I$45
$J$45

Final
Name
Value
Variables to manipulate 0.000
Variables to manipulate 0.000
Variables to manipulate 17.857
Variables to manipulate 0.000

Reduced
Gradient
-1.821
-1.293
0.000
-1.907

Constraints
Cell
Name
$K$50 Avalable Funds Sum

Final
Lagrange
Value
Multiplier
500 0.296428578

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