Question

ABC Investments manages portfolios for a number of wealthy clients. They consider three investment types for their clients: a growth stock fund, an income fund, and a money market fund. For diversification purposes, they impose the following minimum and maximum percentages for each type of investment in each portfolio: Investment Type Minimum % Maximum % Growth Stock Fund 20% 40% Income Fund 20% 50% Money Market Fund 30% 60% The risk index and the annual yield forecast for each type of investment are as follows: Investment Type Risk Index Annual Yield Growth Stock Fund 0.1 18.0% Income Fund 0.07 12.5% Money Market Fund 0.01 7.5% Drexel has a new client with $800,000 to invest, and he would like the weighted average risk index of his portfolio to be no more than 0.05. Help Drexel come up with an investment plan that maximizes the expected annual yield of this client's portfolio.

a) If the client's risk index is increased to 0.055, how would the portfolio yield be affected?

b) If the annual yield for the growth stock fund decreased to 16%, how would the portfolio allocation be affected?

c) The client wants to add a constraint to ensure that the amount in the growth stock fund is no more than the amount invested in the income fund. Would this change the portfolio allocation - if so, how?

d) If the risk index of the income fund is revised downward to 0.06, how would this affect the portfolio yield?

Please use excel solver and mention all formulations!

Answer 1

Answer :