This is a follow-up on http://yetanothermathprogrammingconsultant.blogspot.com/2009/07/ms-solver-foundation-excel-interface.html. Here we explore an LP approximation to the QP models used in the original post. In the original model we used
risk = Σ wt2/T
Here we will replace the quadratic expression by an absolute value:
risk ≈ Σ |wt|/T
The big advantage of an LP model is that we can extend this to a MIP for more complicated modeling situations. Although some solvers support MIQP models, the MIQP algorithms are often not as fast as MIP algorithms. (Microsoft Solver Foundation does have a QP algorithm, but as it is based on an interior point algorithm it is not really suited to be used inside a branch-and-bound framework, so there is no standard MIQP capability).
The LP model is included in the DLL code as follows:
Everything else can stay the same. The results are shown in the screen dump below. As you can see the LP offers a reasonable approximation: the portfolios for different trade-offs between risk and return are quite similar. (Click on the picture to enlarge).
This exercise shows that beyond using the MSF Excel plug-in, the .NET API’s in combination with the modeling language OML are a powerful tool to write applications and that these solutions can be easily integrated in an Office Environment (Access, Excel).