Question

An investment strategy restricts the portfolio to a mix of two stocks A and B with the following price/share and annual returns:

Stock    Price/Share         Annual Return

   A               $35                         5%

   B                $45                         7%

Rank R1: Obtain an annual return of at least 6%.

Rank R2: Limit the investment in stock B to no more than 55% of the total investment.

Assume X1 = dollar amount allocated to stock A, and X2 = dollar amount allocated to stock B.

What is the objective function?

A) Min d1+ + d2-

B) Min R2(d1+) + R1(d2-)

C) Min R1(d1-) - R2(d2+)

D) Min R1(d1+) + R2(d2-)

E) Min R1(d1-) + R2(d2+)

Answer 1

The answer to this question is option E. Detailed explanation is provided in the image attached below:

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