Optimization With R

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Optimization with R
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Guy Yollin
Seattle R Users
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Guy Yollin (Copyright
2010)
Optimization with R
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Personal Introduction
Guy Yollin - http://www.linkedin.com/in/guyyollin
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Professional Experience
Rotella Capital Management, Quantitative Research Analyst
Insightful Corporation, Director of Financial Engineering
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J.E. Moody, LLC, Financial Engineer
Oregon Graduate Institute (OHSU), Adjunct Instructor
Electro Scientific Industries, Director of Engineering, Vision Products
Division
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Education
Oregon Graduate Institute, Masters in Computational Finance
Drexel University, Bachelors in Electrical Engineering
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Using R since 1999

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Outline
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Overview of Optimization
General Purpose Solvers
Linear40
Programming
Quadratic Programming
Differential
Evolution Algorithm
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Optimization Activities in R
Optimization
References
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2010)
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Optimization with R
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Outline
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Linear40
Programming
Differential
Evolution Algorithm
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Optimization
References
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Optimization with R
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Optimization Problem
6
4
2
Given a function f (x)

Find the value x
Such that f (x ) obtains a
maximum
(or minimum) value
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Subject to other constraints
on x
f (x)
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The generic optimization

problem:
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Traditional optimization applications:

Financial and investments
Manufacturing and industrial
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Distribution and networks
Applications in computational statistics:

Model fitting
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Parameter estimation
Maximizing likelihood
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Optimization Functions in R
R directly
supports a 40
number of powerful
optimization
capabilities
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optimize Single variable optimization over an interval

optim General-purpose optimization based on Nelder-Mead,
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quasi-Newton and conjugate-gradient algorithms
nlminb Unconstrained and constrained optimization using PORT
routines
Rglpk
60 R interface to the GNU Linear Programming Kit for solving
LPs and MILPs
solve.QP Quadratic programming (QP) solver
DEoptim Performs evolutionary global optimization via the differential
80 evolution algorithm
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optimize()
Single variable optimization: f (x) = |x 3.5| + (x 2)2
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R Code:
> args(optimize)
function (f,
40 interval, ..., lower = min(interval), upper = max(interval),
maximum = FALSE, tol = .Machine$double.eps^0.25)
NULL
> f <- function(x) {
abs(x - 3.5) + (x - 2)^2
}
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> op <- optimize(f
= f, interval = c(1, 5))
> op
$minimum
[1] 2.5
f (x)
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Optimization Problem
$objective
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[1] 1.25
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Outline
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Linear40
Programming
Differential
Evolution Algorithm
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Optimization
References
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2010)
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Optimization with R
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The optim function

The optim function is a general purpose multi-variate optimizer
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R Code: optim arguments

> args(optim)
function (par, fn, gr = NULL, ..., method = c("Nelder-Mead",
"BFGS",
40"CG", "L-BFGS-B", "SANN"), lower = -Inf, upper = Inf,
control = list(), hessian = FALSE)
NULL
fn objective function that takes a vector of parameters

(required)
par initial value of the parameters (required)
gr the gradient function (optional)
method optimization method to be used (optional)
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lower box constraints of parameters (optional)
upper box constraints of parameters (optional)
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Fitting a Mixture Model

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Time between Eruptions
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0.03
From section 16.3 of Venables

& Ripley 4th Edition
0.02
Time between Old Faithful

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geyser eruptions
Objective function is the
log-likelihood of a mixture of 2
normal
distributions
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0.01
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0.00
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minutes
L(,80
1 , 1 , 2 , 2 ) =
n
X
i=1
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log [
yi 1
1 yi 2
(
)+
(
)]
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Optimization Example
R Code: optimizing with optim
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> # objective function

> mix.obj <- function(p, x)
{
e <- p[1]/p[3] * dnorm( (x - p[2])/p[3] ) +
(1-p[1])/p[5] * dnorm( (x - p[4])/p[5] )
if(any(e
40<= 0)) Inf else -sum(log(e))
}
> # define initial values
> (p0 <- c(p = mean(waiting < 70), u1 = 50, s1 = 5, u2 = 80, s2 = 5))
p
u1
0.361204 50.000000
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s1
u2
5.000000 80.000000
s2
5.000000
> # optimize
> mix.nl0 <- optim(p0, mix.obj, x = waiting)
> mix.nl0$par
p
u1
0.3073520 54.1964325
s1
u2
4.9483442 80.3601824
s2
7.5110485
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> mix.nl0$convergence
[1] 0
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The Mixture Model Fit

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Time between
Eruptions
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0.04
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0.03
Normal mixture
Nonparametric
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0.00
0.01
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Outline
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Linear40
Programming
Differential
Evolution Algorithm
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Optimization
References
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2010)
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Optimization with R
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Linear Programming
Linear programming
(LP)
function and120
mm
40 problems
60have a linear
80 objective100
linear constraints
cT x
minx
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Ax b
x 0
where
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x is a vector of variables to be opitmized (length n)

c is a vector of objective coefficients (length n)
A is a constraints matrix (dimension m x n)
80 b is a vector of constraints bounds (length m)
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Menu Planner
mm the cost
Minimize
worth of meals
Ds
40of a days 60
80 at Mickey100
Subject to
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nutritional constraints
variety constraints (max 4 of any item)
integer constraints (no fractional Big Macs)
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Food
Quarter Pounder
McLean Delux
Big Mac
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FiletOFish
McGrilled Chicken
Small Fries
Sausage McMuffin
Lowfat Milk
Orange Juice
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Minimum
Maximum
Cost
1.84
2.19
1.84
1.44
2.29
0.77
1.29
0.60
0.72
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Cals
510
370
500
370
400
220
345
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2000
3500
Carbs
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42
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20
350
375
Protein
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VitaA
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0
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VitaB
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2
0
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0
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Calc
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0
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2
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Iron
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The Rglpk package

R Code: the Rglpk solve LP
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> library(Rglpk)
Using the GLPK callable library version 4.42
> args(Rglpk_solve_LP)
function (obj, mat, dir, rhs, types = NULL, max = FALSE, bounds = NULL,
verbose
40= FALSE)
NULL
obj
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mat
dir
rhs
type
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bounds
max
vector of objective coefficients

constraints matrix
gt, gte, lt, lte, eq for each constraint
vector of constraints bounds
type of variables (continuous, integer, binary)
box constraints on variables
minimization/maximization problem
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Preparing to call the solver

R Code: Objects in the diet problem
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> fmat
Quarter Pounder
McLean Delux
Big Mac
FiletOFish40
McGrilled Chicken
Small Fries
Sausage McMuffin
Lowfat Milk
Orange Juice
> Cost
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Cals Carbs Protein VitaA VitaB Calc Iron

510
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28
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6
30
20
370
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24
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10
20
20
500
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25
6
2
25
20
370
38
14
2
0
15
10
400
42
31
8
15
15
8
220
26
3
0
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0
2
345
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15
4
0
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15
110
12
9
10
4
30
0
80
20
1
2
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2
2
Quarter Pounder
McLean Delux
1.84
2.19
FiletOFish McGrilled Chicken
1.44
2.29
80
Sausage McMuffin
Lowfat Milk
1.29
0.60
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Big Mac
1.84
Small Fries
0.77
Orange Juice
0.72
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Preparing to call the solver

R Code: Objects in the diet problem
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> Amat <- rbind(t(fmat),t(fmat))

> minAmt
Cals
2000
> maxAmt
Cals
3500
Carbs Protein
350
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VitaA
100
VitaB
100
Calc
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Iron
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VitaA
Inf
VitaB
Inf
Calc
Inf
Iron
Inf
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Carbs Protein
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Inf
> dir <- c(rep(">=",numCons),rep("<=",numCons))

> bounds <- list(lower = list(ind = 1:numVars, val = rep(0,numVars)),
upper = list(ind = 1:numVars, val = rep(4,numVars)))
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> bounds$upper
$ind
[1] 1 2 3 4 5 6 7 8 9
$val
[1] 4 4 4 80
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Calling the LP Solver

R Code: call to Rglpk_solve_LP
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> sol <- Rglpk_solve_LP(obj=Cost, mat=Amat, dir=dir, rhs=c(minAmt,maxAmt),

types = rep("I",numVars), max = FALSE, bounds=bounds, verbose = F)
> (x <- sol$solution)
[1] 2 1 1 0 0 2 1 4 4
> t(fmat) 40
%*% x
[,1]
Cals
3435
Carbs
352
Protein 166
VitaA
103
60
VitaB
550
Calc
253
Iron
107
> Cost %*% x
[,1]
[1,] 15.8280
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Outline
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Linear40
Programming
Differential
Evolution Algorithm
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Optimization
References
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Optimization with R
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Quadratic programming (QP) problems have a quadratic objective
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functionmm
and linear constraints
minx
s.t.
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where
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1
c T x + x T Qx
2
Ax b
x 0
x is a vector of variables to be optimized (length n)
Q is a symmetric matrix (dimension m x n)

c is a vector of objective coefficients (length n)
80A is a constraints matrix (dimension m x n)
b is a vector of constraints bounds (length m)

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Style Analysis
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Style Analysis is a technique that

100the
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attempts80to determine
fundamental drivers of a mutual
funds returns
Sharpes return-based style analysis:
minw var (RMF w1 RB1 . . . wn RBn )
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s.t.
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wi = 1
0 wi 1
var (R
80MF w1 RB1 . . . wn RBn ) = 2(
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w T Vw
c T w ) + var (RMF )
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The quadprog package

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R Code: the solve.QP function
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> library(quadprog)
> args(solve.QP)
function (Dmat, dvec, Amat, bvec, meq = 0, factorized = FALSE)
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NULL
Dmat matrix in quadratic part of objective function

dvec
60 vector in linear part of objective function
Amat constraints matrix
bvec vector of constraints bounds
meq first meq constraints are equality constraints
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R Code: setup to call solve.QP
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> head(z)
WINDSOR
2005-10-03 -0.1593626
2005-10-04 -0.7202912
2005-10-05 -1.3748700
40
2005-10-06 -0.2445986
2005-10-07 0.4073325
2005-10-10 -0.8163311
LARGEVALUE
-0.09535756
-1.27326280
-1.66080920
-0.51217665
0.41993619
-0.88589613
LARGEGROWTH
-0.005995983
-0.762412906
-1.475015837
-0.485592013
0.330131430
-0.564549912
SMALLVALUE SMALLGROWTH
0.3403397
0.4733873
-1.0561886 -0.9461192
-2.8568633 -2.9082448
-0.5641660 -1.1559082
0.7721558
0.7480504
-0.9743418 -1.0118028
> (Dmat = var(z[,-1]))

LARGEVALUE60
LARGEGROWTH
SMALLVALUE
SMALLGROWTH
LARGEVALUE LARGEGROWTH SMALLVALUE SMALLGROWTH

2.959438
2.433880
3.276065
2.951333
2.433880
2.191768
2.760910
2.613387
3.276065
2.760910
4.249303
3.773710
2.951333
2.613387
3.773710
3.559450
> (dvec = var(z[,1], z[,-1]))

[1,]
LARGEVALUE
LARGEGROWTH SMALLVALUE SMALLGROWTH
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2.878281
2.437179
3.214248
2.948217
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R Code: mm
setup to call solve.QP
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> (Amat <- t(rbind(rep(1,N), diag(N), -diag(N))))

[1,]
[2,]
[3,]
[4,]
>
>
>
>
>
>
>
[,1] [,2] [,3] [,4] [,5] [,6] [,7] [,8] [,9]

1
1
0
0
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-1
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-1
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-1
# weights sum to 1, weights >=0, weights <= 0

b0 <- c(1, rep(0,N),rep(-1,N))
#
optimal <- solve.QP(Dmat, dvec, Amat, bvec = b0, meq = 1)
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W <- matrix(round(100*optimal$solution),nrow=2,byrow=T)
dimnames(W) <- list(c("large","small"),c("value","growth"))
W
large
small
value growth
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Outline
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Linear40
Programming
Differential
Evolution Algorithm
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Optimization
References
80
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Optimization with R
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Differential Evolution Algorithm

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Differential Evolution (DE) is a very simple and yet very powerful

population based stochastic function minimizer
Ideal40for global optimization of multidimensional, nonlinear,
multimodal, highly-constrained functions (i.e. really hard problems)
Developed in mid-1990 by Berkeley researchers Ken Price and Rainer
60
Storn
Implemented in R in the package DEoptim
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Rosenbrock Banana Function

2
2 2
f (x40
60x1 ) + 100(x
802 x1 ) 100
1 , x2 ) = (1
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Differential Evolution Algorithm

Permutation 1
mm
x1
0.32
0.29
0.68
-0.51
1.29
-0.94
x2
0.15
0.52
-1.75
0.64
-0.84
1.78
x1
1.29
-0.94
0.32
0.29
0.68
-0.51
x2
-0.84
1.78
0.15
0.52
-1.75
0.64
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Permutation 2
F
Mutant Population
40
x1
-0.48
1.66
-0.23
0.65
-0.45
-0.02
x2
1.31
-2.76
-0.88
-0.74
2.51
1.06
Permutation 3
x1
0.29
0.68
-0.51
1.29
-0.94
0.32
x2
0.52
-1.75
0.64
-0.84
1.78
0.15
Random Crossover Template
Trial Population
x1
x2
60
x1
-0.94
-0.51
-0.23
0.64
0.32
1.29
x2
1.31
0.64
-0.88
-0.74
2.00
1.06
Current Population
x1
-0.94
-0.51
0.29
0.68
0.32
1.29
x2
1.78
0.64
0.52
-1.75
0.15
-0.84
trial member
>
current member
Next Gen Population
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x1
-0.94
-0.51
0.29
0.65
0.32
1.29
x2
1.31
0.64
0.52
-0.74
0.15
1.06
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Differential Evolution Rosenbrock Example

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G2 Function
4 +cos(x )2 2 cos(x )2
2
1
x12 +2x22
f (x1 , x2 ) = | cos(x1 )
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cos(x2 )2
|
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where: 0 x1 10 , 0 x2 10 , x1 x2 0.75 , x1 + x2 15
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Finding G2 Maximum with Differential Evolution

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The DEoptim function

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R Code: DEoptim arguments

> args(DEoptim)
function (fn, lower, upper, control = DEoptim.control(), ...)
40
NULL
fn objective function to be optimized

60 lower bound on parameters
lower
upper upper bound on parameters

control list of control parameters
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The DEoptim.control function

R Code: DEoptim.control arguments
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> args(DEoptim.control)
function (VTR = -Inf, strategy = 2, bs = FALSE, NP = 50, itermax = 200,
CR = 0.5, F = 0.8, trace = TRUE, initialpop = NULL, storepopfrom = itermax +
1, storepopfreq = 1, checkWinner = FALSE, avWinner = TRUE,
40
p = 0.2)
NULL
NP number of population member

60
itermax max number of iterations (population generations)

strategy differential evolution strategy
F step size for scaling difference
CR crossover probability
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VTR value-to-reach
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R Code: mm
call to DEoptim
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> G2 = function( x ) {
if( x[1] >=0 & x[1] <=10 & x[2] >=0 & x[2] <= 10 &
x[1] * x[2] >= 0.75 & x[1] + x[2] <= 15 ) {
s <- cos(x[1])^4+cos(x[2])^4
p <- 40
2*cos(x[1])^2*cos(x[2])^2
r <- sqrt(x[1]^2+2*x[2]^2)
f <- -abs((s-p)/r)
} else {
f <- 0
}
60
return(f)
}
> lower = c(0,0)
> upper = c(10,10)
> res = DEoptim(G2, lower, upper,
control = list(NP = 20, itermax = 100, strategy=1, trace=F))
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mm
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R Code: results of DEoptim

> res$optim
$bestmem
par1 40
par2
1.6013695 0.4683657
$bestval
[1] -0.3649653
$nfeval
[1] 2020
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$iter
[1] 100
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Outline
mm
40
Linear40
Programming
Differential
Evolution Algorithm
60
Optimization
References
80
2010)
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Optimization with R
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Optimization Task View

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Other optimization activities to keep an eye on

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Project
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Description
Location
Contributors
optimizer
optimX, numerical derivatives
R-Forge
Nash, Mullen, Gilbert
Rmetrics2AMPL
R interface to AMPL environment
rmetrics.org
Wuertz, Chalabi
COIN-OR
open source software for OR
coin-or.org
COIN-OR Foundation
R interface to the NuOPT optimizer
msi.co.jp
Yamashita, Tanabe
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RnuOPT
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Outline
mm
40
Linear40
Programming
Differential
Evolution Algorithm
60
Optimization
References
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General Optimization References

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W. N. Venables and B. D. Ripley

Modern Applied Statistics with S, 4th Edition.
Springer, 2004.
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O. Jones and R. Maillardet

Introduction to Scientific Programming and Simulation Using R.
Chapman and Hall/CRC, 2009.
W. J.60Braun and D. J. Murdoch
A First Course in Statistical Programming with R.
Cambridge University Press/CRC, 2008.
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Differential Evolution References

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K. M. Mullen and D. Ardia

DEoptim: An R Package for Global Optimization by Differential
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Evolution.
2009.
K. Price and R. Storn
Differential
Evolution: A Practical Approach to Global Optimization.
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Springer, 2005.
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R Programming for Computational Finance

January 2010
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University of Washington Online

Certificate in Computational Finance
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4.0
HAM1 Performance
HAM1
3.5
EDHEC LS EQ
Factor models
2.5
2.0
1.5
1.0
0.05
0.00
Monthly Return
0.05
0.0 0.10
0.1
0.2
0.4
Financial time series modeling
Drawdown
Statistical analysis of asset

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returns
0.3
40 computational finance
Survey
methods and techniques through
the development of R software
Cumulative Return
3.0
SP500 TR
Jan 96
Jan 97
Jan 98
Jan 99
Jan 00
Jan 01
Jan 02
Jan 03
Jan 04
Jan 05
Jan 06
Dec 06
Date
Portfolio
optimization
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Conclusion
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Thank You for Your Time!

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Guy Yollin (Copyright

Using R since 1999

General Purpose Solvers

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General Purpose Solvers

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Given a function f (x)

The generic optimization

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Traditional optimization applications:

Applications in computational statistics:

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optimize Single variable optimization over an interval

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General Purpose Solvers

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The optim function

R Code: optim arguments

fn objective function that takes a vector of parameters

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Fitting a Mixture Model

Time between Eruptions

From section 16.3 of Venables

Time between Old Faithful

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> # objective function

The Mixture Model Fit

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General Purpose Solvers

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x is a vector of variables to be opitmized (length n)

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The Rglpk package

vector of objective coefficients

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Preparing to call the solver

Cals Carbs Protein VitaA VitaB Calc Iron

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Preparing to call the solver

> Amat <- rbind(t(fmat),t(fmat))

> dir <- c(rep(">=",numCons),rep("<=",numCons))

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Calling the LP Solver

> sol <- Rglpk_solve_LP(obj=Cost, mat=Amat, dir=dir, rhs=c(minAmt,maxAmt),

Guy Yollin (Copyright

General Purpose Solvers

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x is a vector of variables to be optimized (length n)

Q is a symmetric matrix (dimension m x n)

b is a vector of constraints bounds (length m)

Style Analysis is a technique that

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The quadprog package

R Code: the solve.QP function

Dmat matrix in quadratic part of objective function