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Assignment 2 1

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Assignment 2 1

Uploaded by

fidelomondionyango
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Assignment 2

Write your name and RUID on your work documents, and acknowledge the Honor Code.

Please show your entire work with brief, but sufficiently detailed explanation. You can refer to the topical
lectures and the posted examples to support your answer. Please submit your work on Canvas as a Word
summary document, with all calculations and graphing conducted using Excel and Desmos. Answer
Questions 1 and 2 in separate Excel files. Handwritten answers are not accepted. To help grading and adding
comments, do not convert your work into pdf files.

Question 1 (60 points)

Refer to Assignment 1 for further details as needed.

Q1.1. (20 points)

You assist your client to select a location x = (x1 , x2 ) for a service facility that will serve K = 50 customers
by providing a single (identical type) service or commodity to each customer. The facility can be located
anywhere within the unit square 0  x1  1, 0  x2  1; this square models a 100 km by 100 km rectangular
region scaled to the unit square. The customers are modeled by points pk = (pk1 , pk2 ) for k = 1, … , K located
within the unit square. Each customer’s yearly demand for the service is assumed to be a known value: we
also assume that all demands must be satisfied. Customers can have different relative weights, proportionate
to the quantity of their yearly demand. This aspect is expressed by assigning weights wk for k = 1, … , K
to the customers. Assume that the distance between the facility location x and customer k (point p k ) is
expressed by the Euclidean (l2 -norm) distance function defined by

d(x, pk ) = sqrt((x1 - pk1 )2 + (x2 - pk2 )2 ).

We assume that the regions 2 x1 – 4 x2 > 2, 4 x1 + 3 x2 > 6, x1 2 – 2 x2 2 > 0.7, and 3 x1 2 + 5 x2 2 < 1.6 must be
excluded from consideration for the possible location of the facility.

Formulate the mathematical model of this facility location problem.

Q1.2. (10 points)

Create a Desmos graph of the feasible region, and determine the convexity properties of the model.

Q1.3. (30 points)

In order to develop your own numerical example in Excel, choose locations for all customers using the
RAND() function. Next, generate weights for each customer using the RANDBETWEEN(1,100) function.
Finally, copy and save by value an instance of the generated model with fixed customer locations and
weights: use this model for optimization. Each students should have a different numerical example. Solve
your model. Generate an Answer Report, and display the customer and facility configuration on a figure
embedded in your Excel file. You can use Desmos or Excel to create this figure.

See Question 2 on page 2.


Question 2 (40 points)

Consider the portfolio management model discussed in the topical lecture on Spreadsheet Modeling. Make
a copy of the posted version of the Excel file titled Portfolio Management [Markowitz Model], and work
on your own copy.

Q2.1 (10 points)

Start your work by expanding your data set, adding 10 more data to each column of the given historical
stock returns. Your data should be chosen by yourself, to approximately resemble the given data. Every
student should have her/his own data set. After adding your data, calculate the corresponding estimated
expected return vector, and variance/covariance matrix. Your data should be different from the original
ones, however, make sure to create overall realistic data. To illustrate this point, don’t create more than
40% return or more than 30% loss, for any stock in any given year.

Q2.2 (30 points)

Following the lecture, we are interested in finding optimized portfolios which correspond to points on the
efficient frontier.

Based on your revised data set (using all 20 annual return data for each stock), find the minimal and maximal
expected return that could be achieved. You can round your expected return data: e.g., 6.81% can be
rounded up to 7% and 23.26% can be rounded down to 23%. Divide the range between your minimal and
maximal expected return data into steps of 0.5%: these will be your target return parameters t. In the above
example, you would consider the values t = 7%, 7.5%, 8%, … , 22%, 22.5%, 23%. Next, solve the resulting
sequence of these portfolio optimization problems, by minimizing the variance of the portfolio for all these
levels of target returns.

Based on your optimization results, create a graph with the points found by optimization on the efficient
frontier. State your conclusion regarding the tradeoff between (estimated) portfolio return and risk in a few
sentences. Which one of your own calculated (return, risk) combinations would you recommend to your
client as her/his financial advisor?

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