Question

J.D. Williams, Inc. is an investment advisory firm that manages more than $120 million in funds for its numerous clients. The company uses an asset allocation model that recommends the portion of each client's portfolio to be invested in a growth stock fund, an income fund, and a money market fund. To maintain diversity in each client's portfolio, the firm places limits on the percentage of each portfolio that may be invested in each of the three funds. General guidelines indicate that the amount invested in the growth fund must be between 20 and 40 percent of the total portfolio value. Similar percentages for the other two funds stipulate that between 20 and 50 percent of the total portfolio value must be in the income fund and that at least 30 percent of the total portfolio value must be in the money market fund. In addition, the company attempts to assess the risk tolerance of each client and adjust the portfolio to meet the needs of the individual investor. For example, Williams just contracted with a new client who has $800,000 to invest. Based on an evaluation of the client's risk tolerance. Williams assigned a maximun risk index of 0.05 for the client. The firm's risk indicators show the risk of the growth fund at 0.10, the income fund at 0.07, and the morney market fund at 0.01. An overall portfolio risk index is computed as a weighted average of the risk rating for the three funds, where the weights are the fraction of the client's portfolio invested in each of the funds. Additionally, Williams is currently forecasting annual yields of 18 percent for the growth fund, 12.5 percent for the income fund, and 7.5 percent for the money market fund. Based on the information provided, how should the new client be advised to allocate the $800,000 amont the growth, income, and money market funds? Develop a linear programing model that will provide the maximum yield for the portfolio. Use your model to develop a managerial report.

question:   In the Investment Strategy Case, suppose the maximum acceptable risk for the portfolio is 0.04.   Write down the new constraint to limit the portfolio risk to 0.04 using variables G, I, M where

G = amount invested in growth stock fund

I = amount invested in income stock fund

M = amount invested in money market fund

Answer 1

G = amount invested in growth stock fund

I = amount invested in income stock fund

M = amount invested in money market fund

The problem can be modeled on excel as shown below:-

PS : -Here the values in the cells : E3,E4,E5 are arbitrary initial values.

Formula Sheet for the above image is :-

FINAL SOLUTION