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Eric Zivot Department of Economics University of Washington January 3, 2000 This version: February 6, 2001

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Matrix Algebra Review

A matrix is just an array of numbers. The dimension of a matrix is determined by the number of its rows and columns. For example, a matrix A with n rows and m columns is illustrated below a11 a12 . . . a1m a21 a22 . . . a2m A = . . . . ... . . . (n×m) . . an1 an2 . . . anm where aij denotes the ith row and j th column element of A. A vector is simply a matrix with 1 column. For example, x1 x2 x = . (n×1) . . xn

is an n × 1 vector with elements x1 , x2 , . . . , xn . Vectors and matrices are often written in bold type (or underlined) to distinguish them from scalars (single elements of vectors or matrices). The transpose of an n × m matrix A is a new matrix with the rows and columns of A interchanged and is denoted A0 or A| . For example, · ¸ 1 4 1 2 3 , A0 = 2 5 A = 4 5 6 (3×2) (2×3) 3 6 1

x (3×1) A symmetric matrix A is such that A = A0 . For example. For example. Obviously this can only occur if A is a square matrix.1 1.1.1 Basic Matrix Operations Addition and subtraction Matrix addition and subtraction are element by element operations and only apply to matrices of the same dimension. 2 . 0 5 Then c·A= · 2 · 3 2 · (−1) 2 · (0) 2·5 ¸ = · 6 −2 0 10 ¸ . let · ¸ · ¸ 4 9 2 0 A= . Scalar Multiplication Here we refer to the multiplication of a matrix by a scalar number. 2 1 0 7 Then A+B = A−B = 1. i. This is also an element-by-element operation. consider the 2 × 2 matrix · ¸ 1 2 A= . 2 1 Clearly. the number of rows of A is equal to the number of columns. let c = 2 and · ¸ 3 −1 A= . For example.2 · 4 9 2 1 4 9 2 1 ¸ + − · 2 0 0 7 2 0 0 7 ¸ = = · 4+2 9+0 2+0 1+7 4−2 9−0 2−0 1−7 ¸ = = · 6 9 2 8 ¸ . 3 (1×3) x0 = £ ¤ 1 2 3 . A =A= 0 1 = 2 . ¸ · ¸ · ¸ · ¸ · 2 9 2 −6 . · 1 2 2 1 ¸ .1. 1.e.. B= .

In general.1. Let · ¸ · ¸ 1 2 1 2 1 and B = . As another example. let nal 1 4 2 .3 Matrix Multiplication Matrix multiplication only applies to conformable matrices. if A is n × m and B is m × p then C = A · B is n × p. y = 5 . if A is m× n and B is m × p then A and B are conformable. (2×2) (2×1) Then A · B ¸ · ¸ 5 = · 6 · ¸ 1·5+2·6 = 3·5+4·6 · ¸ 17 = . 39 1 2 3 4 · (2×2) (2×1) As a & example. x= 3 6 Then 4 £ ¤ x0 y = 1 2 3 · 5 = 1 · 4 + 2 · 5 + 3 · 6 = 32 6 3 . A and B are conformable matrices of the number of columns in A is equal to the number of rows in B. A = 3 4 3 4 2 (2×2) (2×3) Then A · B = · · 1 2 3 4 ¸ · ¸ 1 2 1 · 3 4 2 (2×2) (2×3) 1·1+2·3 1·2+2·4 1·1+2·2 = 3·1+4·3 3·2+4·4 3·1+4·2 · ¸ 7 10 5 = = C 15 22 11 (2×3) ¸ The resulting matrix C has 2 rows and 3 columns. let · ¸ · ¸ 1 2 2 A = 3 4 and B = 6 . The mechanics of matrix multiplication is best explained by example.1. For example.

. . 0 . pre or post multiplying a matrix A by a conformable identity matrix gives back the matrix A. . To illustrate. Multiplying any number by 1 gives back that number. = x1 + · · · + xk = x 1 = x1 . xk k=1 1 4 . . let · ¸ 1 0 I= 0 1 denote the 2 dimensional identity matrix and let · ¸ a11 a12 A= a21 a22 denote an arbitrary 2 × 2 matrix.3 Inverse Matrix To be completed.4 Representing Summation Using Vector Notation n X k=1 Consider the sum xk = x1 + · · · + xk. In matrix algebra. . Then ¸ · ¸ · 1 0 a11 a12 I·A = · a21 a22 0 1 · ¸ a11 a12 = =A a21 a22 and A·I = = · · a11 a12 a21 a22 a11 a12 a21 a22 ¸ · ¸ 1 0 · 0 1 ¸ = A. 1. . . . Let x = (x1 . xn · . .1. Then 1 n X £ ¤ . xn )0 be an n × 1 vector and 1 = (1. . 1)0 be an n × 1 vector of ones.2 The Identity Matrix The identity matrix plays a similar role as the number 1. 1.

5 Representing Systems of Linear Equations Using Matrix Algebra Consider the system of two linear equations x+y = 1 2x − y = 1 (1) (2) which is illustrated in Figure xxx. xn · . Substituting this value into the equation x + y = 1 gives 2y + y = 1 and solving for y gives y = 1/3. xn n X k=1 Last. 1 · . . 1 Soving for x gives x = 2y. . . consider the sum of cross products X x2 . consider the sum of squared x values n X k=1 x1 n X £ ¤ . . k=1 yn Note that x0 y = y0 x. . xn · . = x1 y1 + · · · xn yn = x y = x1 . = x2 + · · · + x2 = 1 n k k=1 n xk yk = x1 y1 + · · · xn yn . 1. .1 0 x x = x1 . 5 . This point of intersection is determined 3 3 by solving for the values of x and y such that x + y = 2x − y 1 . 0 1 x = 1 . Equations (1) and (2) represent two straight lines which intersect at the point x = 2 and y = 1 . This sum can be compactly represented by y1 n X £ ¤ . = x1 + · · · + xn = xk . 0 . . . Solving for x then gives x = 2/3. k=1 xn x2 = x2 + · · · + x2 .and Next. k 1 n as This sum can be conveniently represented x £ ¤ . xk yk .

e. Next. pre-multiply both sides by B to give B·A·z = B·b =⇒ I · z = B · b =⇒ z = B · b ¸· 1 1 ¸ = · b11 · 1 + b12 · 1 b21 · 1 + b22 · 1 ¸ or If such a matrix B exists it is called the inverse of A and is denoted A−1 . Similarly.. By simple division we have that x = a x = a−1 x. As long as we can determine the elements in A−1 then we can solve for the values of x and y in the vector z. 1 Suppose a is a number. There are general numerical algorithms for & nding the elements of A−1 and typical spreadsheet programs like Excel have these algorithms available. a = 2.g. we may express the solution for z as z = A−1 b. such that B · A = I. However. z= · x y ¸ and b = · 1 1 ¸ . Then we know that a · a = a−1 a = 1. if A is a (2 × 2) matrix then there is a simple formula for A−1 .The two linear equations can be written in matrix form as · ¸· ¸ · ¸ 1 1 x 1 = 2 −1 y 1 or A·z=b where A= · 1 1 2 −1 ¸ . the inverse matrix A−1 plays a similar role as the inverse of a number. with elements bij . In the equation A · z = b. Similarly. Since the system of linear equations has a solution as long as the two lines intersect. where I is the (2 × 2) identity matrix. Intuitively. If there was a (2 × 2) matrix B. A= a21 a22 6 · x y ¸ = · b11 b12 b21 b22 . −1 in matrix algebra A A = I where I is the identity matrix. we can determine the elements in A−1 provided the two lines are not parallel. in matrix algebra if we want to solve the system of equation Ax = b we multiply by A−1 and get x = A−1 b. then we could solve for the elements in z as follows. Using B = A−1 . consider solving 1 the equation ax = 1. Let A be a (2 × 2) matrix such that ¸ · a11 a12 .

Then A −1 By brute force matrix multiplication we can verify this formula · ¸· ¸ 1 a22 −a12 a11 a12 −1 A A = a21 a22 a11 a22 − a21 a12 −a21 a11 · ¸ 1 a22 a11 − a12 a21 a22 a12 − a12 a22 = a11 a22 − a21 a12 −a21 a11 + a11 a21 −a21 a12 + a11 a22 · ¸ 1 a22 a11 − a12 a21 0 = 0 −a21 a12 + a11 a22 a11 a22 − a21 a12 ¸ · a22 a11 −a12 a21 0 a11 a22 −a21 a12 = −a21 a12 +a11 a22 0 a11 a22 −a21 a12 · ¸ 1 0 = . 3 3 In general. if we have n linear equations in n unknown variables we may write the system of equations as a11 x1 + a12 x2 + · · · + a1n xn = b1 a21 x1 + a22 x2 + · · · + a2n xn = b2 . z = · −1 b ¸ · ¸ A 1 1 1 3 3 = −1 2 1 · 3 ¸3 · ¸ 2 x 3 = = 1 y 3 so that x = 2 and y = 1 . . . · 1 3 2 3 1 3 −1 3 ¸· 1 1 2 −1 ¸ = · 1 0 0 1 ¸ . 0 1 Let s apply the above rule to & the inverse of A in our example: nd · ¸ · 1 1 ¸ 1 −1 −1 −1 3 A = = 3 −1 . an1 x1 + an2 x2 + · · · + ann xn = bn 7 . 2 −1 − 2 −2 1 3 3 Notice that A A= Our solution for z is then −1 1 = a11 a22 − a21 a12 · a22 −a12 −a21 a11 ¸ . . . = .

A. . New Jersey: Rowman & Little& eld.. an2 · · · ann (n×n) (n×1) x1 x2 ... . . Priceton. (1987). [2] Huang.or which we may then express a11 a21 . Theory of Financial Decision Making.Y. J. xn = b1 b2 . bn A · x = b. New Jersey: Princeton University Press. 3 Problems To be completed References [1] Campbell. Lo. .E. R. (n×1) The solution to the system of equations is given by x = A−1 b where A−1 A = I and I is the (n × n) identity matrix. C. Lo and MacKinlay (1996). . .C. Foundations for Financial Economics. 2 Further Reading Excellent treatments of portfolio theory using matrix algebra are given in Ingersol (1987). The Econometrics of Financial Markets. an1 in matrix form as a12 · · · a1n a22 · · · a2n . (1988). then we generally use numerical algorithms to & the elements in nd A−1 .W. Huang and Litzenberger (1988) and Campbell. A. . [3] Ingersoll. and MacKinlay. . Totowa. If the number of equations is greater than two. and Litzenbeger.H. 8 .-F. New York: North-Holland. J. (1997).

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