In order to run this model, you must have your Excel's "solver add-in" installed to your computer.

To install the "solver add-in",

1. From the menu, choose "TOOLS",

2. Choose, "ADD-INS",

3. In the "Add-Ins Available" list, have your "SOLVER ADD-IN" checked.

If you have not chosen the full installment option when you had been installing your Microsoft Office,

you might need your original Microsoft Office disks during this configuration.

METIN KILIC

Investment Optimization

Page 3

Risk & Return Optimization in Project Selection under Budget Constraint

Present Value of the Present value of Expected ProfitProject Revenues (PV's) the Investments (NPV's)

1 $675,000 $512,500 $162,500 $75,0002 $1,050,000 $780,000 $270,000 $115,0003 $360,000 $250,000 $0 $250,0004 $720,000 $600,000 $0 $120,0005 $1,000,000 $800,000 $0 $100,0006 $90,000 $80,000 $0 $20,0007 $630,000 $525,000 $105,000 $75,0008 $225,000 $150,000 $75,000 $15,000

Budget $2,000,000Invested $1,967,500Surplus $32,500

Total Profit $612,500Total Risk $232,707Return over Risk 2.63

Standard Deviation of CF's

The aim is to maximize the profit over risk ratio of the overall project portfolio subject to the budget constraint. After running the model, projects with decision-1 must be undertaken, and projects with decision-0 must be omitted. (See Column-H.)

- Do not change the cells with italic characters. There are formulas- If you have less than 8 project to optimize, simply clear the unnecessary raws in the table.- Do not forget to fill in the correlation matrix...

Investment Optimization

Page 4

Risk & Return Optimization in Project Selection under Budget Constraint

Decisions1 0-11 0-10 0-10 0-10 0-10 0-11 0-11 0-1

The aim is to maximize the profit over risk ratio of the overall project portfolio subject to the budget constraint. After running the model, projects with decision-1 must be undertaken, and projects with decision-0 must be omitted. (See Column-H.)

FILL IN THE CORRELATION MATRIX

PROJECTS 1 2

1 1 0.7

2 0.7 1

3 0.6 0.4

4 0.48 0.23

5 0.38 0.78

6 0.9 0.85

7 0.4 0.5

8 0.05 0.9

Metin Kilic:These are the correlation numbers between two projects' expected annual percentage-wise retruns. You can examine the differences in the outcome of the model under different scenarios, for example by changing the discount factors regarding the state of the economy.There are formulas on the cells with italic characters. Therefore, they are locked.

FILL IN THE CORRELATION MATRIX

3 4 5 6

0.6 0.48 0.38 0.9

0.4 0.23 0.78 0.85

1 0.57 0.32 0.54

0.57 1 -0.24 0.65

0.32 -0.24 1 0.5

0.54 0.65 0.5 1

-0.23 0.45 0.64 0.78

0.54 0.46 0.8 -0.05

Metin Kilic:These are the correlation numbers between two projects' expected annual percentage-wise retruns. You can examine the differences in the outcome of the model under different scenarios, for example by changing the discount factors regarding the state of the economy.There are formulas on the cells with italic characters. Therefore, they are locked.

FILL IN THE CORRELATION MATRIX

7 8

0.4 0.05

0.5 0.9

-0.23 0.54

0.45 0.46

0.64 0.8

0.78 -0.05

1 0.46

0.46 1

Metin Kilic:These are the correlation numbers between two projects' expected annual percentage-wise retruns. You can examine the differences in the outcome of the model under different scenarios, for example by changing the discount factors regarding the state of the economy.There are formulas on the cells with italic characters. Therefore, they are locked.

INFOInvestment OptimizationCorrelation Matrix