ASSIGNMENT NAME: Decision Making Techniques

STUDENT NAME: Shezan Shakeel

SUBJECT CODE: MTH 543

Q1: Simulation: Monte Carlo Model

Investment Portfolio Model

Year opening balance Return Gross Closing balance

1 100,000 5.40% 5,400 105,400
2 105,400 5.40% 5,692 111,092
3 111,092 5.40% 5,999 117,091
4 117,091 5.40% 6,323 123,413
5 123,413 5.40% 6,664 130,078

5-year closing balance 130,078

Net Gain (Loss) 30,078
Net Return % 30.08%

Using the rate of return of 5.4%, the overall return for the 5 years period is obtained as 30,078
which translates to 30.08%

Using Simulation

The obtained return is treated as the expected return. Using this value and a standard deviation
of 8.3% it is possible to apply the Monte Carlo simulation to obtain more precise values of
return.

Generated random numbers

-0.028069864

0.026309942

0.00161808

0.073822315

0.022152059

0.208068866

0.068844255

0.064757332

0.004758006

0.054720628
 0.166131286

-0.094741674

0.00143974

0.017227501

0.108443876

0.078308854

0.009010154

0.194946022

0.087722026

0.086930534

0.024713841

0.079012214

0.121825079

0.09465919

0.053717486

Year opening balance Return Gross Closing balance

1 100000.00 3.47% 3474.56 105400.00

2 105400.00 -4.86% -5125.98 100274.02

3 100274.02 1.60% 1602.03 101876.05

4 101876.05 18.70% 19045.84 120921.88

5 120921.88 -3.61% -4368.60 116553.28

5-year closing balance 116553.28

Net Gain (Loss) 14627.85

Net Return % 14.63%

Upon undertaken 25 simulations for the 5-year period the value of the gain is obtained as
14627.85 which transforms to 14.63% of the initial investment.

Other applications of the simulation techniques

One of the major advantages of simulation is it allows business to setup environment where
new ideas can be tested prior to coming up with complex business decisions. The techniques
used in the analysis allows for modification of parameters to have a glimpse of the relevant
information that is most crucial for the decision making. By applying this, business are able to
make better and less riskier choices. Some of the areas that we can apply simulation include:

Training: When simulation is applied during training sessions people are able to experience
complex situations and try a variety of techniques. An example of training on how to complete
tasks using software.

Improvement of processes: Simulation methods allows experimentation of processes to help

analyze business practices. A typical simulation model puts focus on unique aspect of the
business-like manufacturing or finance. Through enhancing the details of how the operations
are conducted bottlenecks can be identified and hence come up with small changes which can
have big impacts.

Prediction of Outcomes: Making use of spreadsheet it’s possible to simulate the future
outcomes under different conditions. This way it’s possible to come up with more reliable
forecasts.

Risk Management: By means of data manipulation a business is able to determine the efficient
amount that needs to be invested so as to optimize the profits. One of the techniques that are
applicable in this case is the Monte Carlo simulation.

Q2: Regression

a. Devising linear regression model

From the excel output given, the intercept represents the value of the house price when all
the other variables are zero. Thereafter the values under the coefficients represent the
multiplier of the variables affecting the price.
By denoting the given variables by values x1 to x7 and the house price by y we can derive
the linear regression model below

Denoting the variables

Price Squre Footage Bedrooms Bathrooms Car garage have a pool on a lake on golf course
y x1 x2 x3 x4 x5 x6 x7
 The reliability of the linear model in predicting the house prices will be evaluated based
on the model significance. Looking at the F statistic it indicates a value that is way below
1% and 5% hence at either 99% or 95% level of significance the model can be accepted
as reliable. On the other hand, the value of R square is 84.98%, this indicates that up to
approximately 85% of the house price variations can be explained by the changes in the
seven variables (x1 to x7) listed above

b. Other predictive approaches

Logistic regression: This is a regression that is best applicable in case where the
dependent is dichotomous. It is used in describing data and give explanations in a
situation where there is one binary variable and one or more ordinal, nominal interval or
ratio level independent variable.

Random forests: These are ensemble learning techniques that apply in classifying
regression and other tasks. Their operation depends on the construction of a multitude
decision trees at the training phase and outputting the class that represents the mode of the
classes.

Q3: Linear Programming Model

To obtain the optimal nutritional needs there is need for the foods to be satisfied in a way that
all the ingredients are supplied in the right quantity while at the same time minimizing the
cost.

Therefore, to develop the linear problem will first arrange the constraints

Let S represent Steak and p represent potatoes

Then Carbohydrates, Protein, Fat these are the set of constraints

The function to be minimized

Applying the Simplex method in excel we have

 Grams of Ingredients per
Serving
Ingredient Steak Potatoes Total Daily Requirement (grams)
Carbohydrates 60 90 150 150
Protein 240 30 270 120
Fat 180 12 192 180
Cost per serving $48 $12
Servings 4 2
Total Cost $ 60

The table represents the right quantity of each food to serve that will minimize the cost while
at the same time giving the required nutrition.

Limitation of the Simplex approach

The methods entail understanding of many technical aspects that are not easy to be understood
by many managers who have no prior knowledge of the topic.

Also, linear programming tasks require lots of expertise, time and are therefore cumbersome.
The method needs several steps to be adopted and must proceed in a systematic manner prior
to arriving at the correct solution.

Alternatives to the Simplex approach

Graphical solutions, instead of applying the simplex, method it is possible to obtain a solution
of the linear programme by using the graphical method. This entails graphing the constraints
and then using the objective function to arrive at the optimal solution.
REFERENCES:

https://en.wikipedia.org/wiki/Random_forest
https://statistics.laerd.com/spss-tutorials/binomial-logistic-regression-using-spss-
statistics.php
https://stats.idre.ucla.edu/other/examples/ara/
https://stats.stackexchange.com/questions/215490/can-i-run-a-regression-when-both-
independent-and-dependent-variables-are-all-dic
https://en.wikibooks.org/wiki/Operations_Research/The_Simplex_Method
https://www.analyticsvidhya.com/blog/2017/02/lintroductory-guide-on-linear-
programming-explained-in-simple-english/
http://www.finance-assignment.com/limitations-of-lpp-simplex-method