Answer to Question #261318 in Financial Math for whoisveek

Question

DICT has sh. 5 million available for immediate investment and wishes to maximize the interest earned on its investments over the next year. The specifics of possibilities are shown in the table below:

INVESTMENT

INTEREST EARNED

RISK SCORE

Trade Credits

7%

1.7

Corporate bonds

10%

1.2

Gold stocks

19%

3.7

Platinum stocks

12%

2.4

Mortgage securities

8%

2.0

Construction loans

14%

2.9

For each type of investment, the table shows expected return over the next year as well as a score that indicates the risk associated with investment (a lower score implies less risk). 

To encourage a diversified portfolio, several limits have been placed on the amount that can be committed to any one type of investment:

(1) No more than 25% of the total amount may be invested in any single type of investment.

(2) At least 30% of the funds invested must be in precious metals.

(3) At least 45% must be invested in trade credit and corporate bonds, and

(4) The average risk score of the total investment must be 2 or less.

Answer 1

diversified portfolio:

Gold stocks - 10%

Platinum stocks - 20%

Trade Credits - 20%

Corporate bonds -25%

Mortgage securities - 15%

Construction loans - 10%

average risk score = Risk Impact Rating x Risk Probability

average risk score =

$=0.2\cdot1.7+0.25\cdot1.2+0.1\cdot3.7+0.2\cdot2.4+0.15\cdot2+0.1\cdot2.=1.72<2$