Pure Mathematics IA

Teacher:
Ms. Timson

Group Members:
Johann Baynes
Emmanuel Clement
Rayanna Crosby
Andre Davis

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Table of Contents
Table of Contents........................................................................................................................ 2
Project Title.................................................................................................................................. 3
Problem Statement...................................................................................................................... 4
Problem................................................................................................................................ 4
Purpose of Project................................................................................................................ 4
Mathematical Formulation............................................................................................................5
Method......................................................................................................................................... 6
The Problem Solution..................................................................................................................7
Discussion of Findings.................................................................................................................9
Conclusion................................................................................................................................. 11
Bibliography............................................................................................................................... 12

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Project Title

To determine the optimal portfolio for investors by minimizing risk and maximizing

returns, with the use of matrices.

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Problem Statement
Problem
A group of five workers from the Nation Gas Company of Trinidad and Tobago (NGCTT)
have recently been retrenched. With their severance pay and bank loans they decide to
start investing. They pool together a total of $500,000 TTD and want to invest into three
assets A, B and C. Each asset has a given risk and a given profit. The investors want to
maximize the expected return which should at least give $30,000 TTD and minimize risk
which should not exceed $20,000 TTD. One of the investors suggested that they employ the
help of their grand-child who studies Pure Mathematics to build a portfolio which satisfies
these requirements. The student will utilize matrices to solve a system of linear equations,
thereby finding the most profitable distribution of resources to reach the maximum
expected return.

Purpose of Project
The purpose of this project is to use matrices to set up linear equations to find the amount
of money a group of investors need to invest in three assets in order meet a certain profit
while staying below a certain risk. These equations will then be used to construct a specific
portfolio.

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Mathematical Formulation
A : Amount of money in asset A in TTD
B: Amount of money in asset B in TTD
C : Amount of money in asset C in TTD

RA: The expected risk of asset A in the portfolio

RB: The expected risk of asset B in the portfolio
RC: The expected risk of asset C in the portfolio

PA: The expected return(profit) of asset A in the portfolio

PB: The expected return(profit) of asset B in the portfolio
PC: The expected return(profit) of asset C in the portfolio

Method
1. Set up an equation to represent the total amount of money invested as a summation of
asset weights

Total amount of money invested:

500000= A +B+ C

2. Set up an equation for the minimum risk of the portfolio as a summation of the products
of corresponding asset weights and their expected risks

The expected risk on portfolio:

20000=A R A + B R B +C RC

3. Set up an equation for the total profit of the portfolio as a summation of the products of
the asset weights and associated expected returns

The expected profit on portfolio:

30000=A P A +B P B +C PC

4. Set up linear equations to solve the optimization problem.

500000= A +B+ C
20000=A R A + B R B +C RC
30000=A P A +B P B +C PC

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this system of equations may be represented in matrix form as:

( )( ) ( )
1 1 1 A 500000
R A R B RC B = 20000
P A P B Pc C 30000

5. Solve the matrix, using Gaussian elimination to determine the weights of the assets in
the portfolio.

The Problem Solution:

Assumptions
 The risk of any investment does not change throughout the one-year period for which
the risks were projected
 Profit on each investment does not change throughout a one-year period
 The profit and risk chosen by investors provide valid solutions (∈ Z+)

 Provided the following table was generated by a statistical software as the most
ideal conditions:

Table1: Table Showing Expected Profit and Expected risk for the Assets A,B and C
Assets Expected Profit Expected Risk
A 0.05 0.01
B 0.06 0.03
C 0.07 0.10

Using the formulae and the equations above to solve for the weights of assets A, B, and C in
the portfolio that yield a profit of $30,000 TTD while keeping the portfolio risk below the
specified risk of $20,000 TTD the problem may be solved as follows:

Total amount of money invested:

500000= A +B+ C

The expected risk on portfolio:

20000=A (0.01)+ B (0.03)+C (0.10)

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The expected profit on portfolio:
30000=A (0.05)+B (0.06)+C( 0.07)

To solve the optimization problem, the following system of linear equations must be set up:
500000= A +B+ C
20000=A (0.01)+ B (0.03)+C (0.10)
30000=A (0.05)+B (0.06)+C( 0.07)

( | )
1 1 1 500000
0.01 0.03 0.10 20000
0.05 0.06 0.07 30000

( | )
1 1 1 500000
R2 →0.01 R1−R2 0 −0.02 −0.09 −15000
0.05 0.06 0.07 30000

( | )
1 1 1 500000
R2 →−50 R2 0 1 4.5 750000
0.05 0.06 0.07 30000

( | )
1 1 1 500000
R3 →0.05 R1−R 3 0 1 4.5 750000
0 −0.01 −0.02 −5000

( | )
1 1 1 500000
R3 →0.01 R2 + R3 0 1 4.5 750000
0 0 0.025 2500

( | )
1 1 1 500000
1
R3 → R 0 1 4.5 750000
0.025 3
0 0 1 100000

Solving for the weight of each assets A, B and C:

For asset C:
C=100000

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For asset B:

B+ ( 4.5 ) C=750000
B+ ( 4.5 )(100000)=750000
B=750000−( 4.5 ) (100000)
B=300000

For asset A:
A+ B+C=500000
A+300000+100000=500000
A=500000−( 300000+100000 )
A=100000

Therefore, the investors should invest $100000.00 TTD in asset A, $300000.00TTD in asset B
and $ 100000.00TTD in asset C based on the expected returns and risks of the portfolio.

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Appropriate Diagrams

F
igure 1: Diagram showing the intersection of the planes represented by the three equations:
500000= A +B+ C (purple),20000=0.01 A+ 0.03 B+0.10 C (blue) and
30000=0.05 A +0.06 B+ 0.07 C (red)

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Discussion of Findings
This project displayed how mathematical concepts can be transferred and utilized into the
real world. The project met the purpose by constructing linear equations using algebra, and
by matrices(row reduction) using the rules :
Rn---> RM
Rn---->ARM , A ≠0
Rn-----> ARn+BRM ; A ≠B
The equations were displayed and solved for the money needed to invest into three assets,
given a specified profit. All solutions were real and distinct for each variable.
This project can be utilized by investors while constructing portfolios. In real life however,
investors may not only invest in three assets. In cases like this similar assets can be split up
into three groups and an average risk and profit of each group can be found. Alternatively,
Cramer’s rule or the inverse matrix method may be utilized rather than row reduction to
solve the matrix. When there are two assets 2x2 matrices can be used while following the
same method.

A main drawback of this project is that the method must be used on a yearly basis as risk,
profit and the amount invested will vary over years. Another drawback is that the project
does not calculate the best returns and lowest risk but rather the investor must choose a
profit and risk. Instead, an econometric model can be used where regression analysis is
conducted on each investment to estimate their values with time, usually involving use of
differential equations.

Conclusion
In conclusion, matrices were used to set up equations to find the amount of money a group
of investors needed to invest in three assets in order meet a profit of $30,000 TTD and stay
below a certain risk of $20,000 TTD. This was found to be $100000.00 TTD in asset A,
$300000.00 TTD in asset B and $100000.00 TTD in asset C.

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Bibliography
1. Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments (10th ed.). McGraw-Hill
Education.

2. Elton, E. J., Gruber, M. J., Brown, S. J., & Goetzmann, W. N. (2014). Modern portfolio
theory and investment analysis (9th ed.). John Wiley & Sons.

3. Gupta, V., & Arora, A. (2014). Portfolio optimization using linear programming.
International Journal of Scientific and Research Publications, 4(5), 1-4.

4. Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), 77-91.

5. Zhang, S., Wang, J., & Zhang, Y. (2015). An intelligent algorithm for portfolio
optimization based on particle swarm optimization. Journal of Computational and
Theoretical Nanoscience, 12(2), 308-314.

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