Innis Investments manages funds for a number of companies and wealthy clients. The investment strategy is tailored to each client’s needs. For a new client, Innis has been authorized to invest up to $1.2 million in two investment funds: a stock fund and a money market fund. Each unit of the stock fund costs $50 and provides an annual rate of return of 10%; each unit of the money market fund costs $100 and provides an annual rate of return of 4%.
The client wants to minimize risk subject to the requirement that the annual income from the investment be at least $60,000. According to Innis’ risk measurement system, each unit invested in the stock fund has a risk index of 8, and each unit invested in the money market fund has a risk index of 3; the higher risk index associated with the stock fund simply indicates that it is the riskier investment. Innis’s client also specified that at least $300,000 be invested in the money market fund.
Let S = units purchased in the stock fund
M = units purchased in the money market fund
Min |
8S |
+ 3M |
||
s.t. |
||||
50S |
+ 100M |
<= |
1,200,000 |
|
5S |
+ 4M |
>= |
60,000 |
|
M |
>= |
3,000 |
||
S, M |
>= |
0 |
a)
4000 units should be purchased in the stock fund
10000 units should be purchased in the money market fund
Minimum total risk is 62000
b)
c)
$60000 annual income will be earned by portfolio
d)
Total amount invested = $1200000
Total income earned = $60000
Rate of return = $60000/$1200000 *100% = 5%
Innis Investments manages funds for a number of companies and wealthy clients. The investment strategy is...
nnis Investments manages funds for a number of companies and wealthy clients. The investment strategy is tailored to each client’s needs. For a new client, Innis has been authorized to invest up to $3 million in five investment funds: stock fund A, stock fund B, Bond fund A, Bond fund B and a money market fund. Stock fund A provides an annual rate of return of 15%, stock fund B provides an annual rate of return of 12.5%, Bond fund...
Problem 2-39 innis Investments manages funds for a number of companies and weslthy cients. The investment strategy is tailored to each client's needs. For a new dient, Innis has been authorized to invest up to $1.2 million in two investment funds: a stock fund and a money market fund costs $100 and provides an annual rate of return of 4%. money market fund. Each unit of the stock fund costs SS and prov des an annual rate of return of...
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