The portfolio Manager of Pension planners has been asked to invest
$1,000,000 of a large pension fund. The investment research development
department has identified six mutual funds with varying investment
strategies, resulting in different potential returns and associated
risks, as summarized in the following table:
1 2 3 4 5 6
Price
($/share) 455 76 110 17 23 22
Expected
Return(%) 30 20 15 12 10 7
Risk
Category High High High Medium Medium low
One way to control the risk is to limit the amont of money invested in
the various funds. To that end, the management of Pension Planners has
specified the following guidelines:
the total amount invested in high risk funds must be between 50 and 75%
of the portfolio.
The total amount invested in medium risk funds must be between 20 and
30% of the portfolio
The total amount invested in low risk funds must be at least 5 % of the
portfolio
A second way to control risk is to diversify- that is, to spread the
risk by investing in many different alternatives. The management of
Pension Planners, has specified that the amount invested in the
high-risk funds 1,2 and 3 should be in the ratio 1:2:3, respectively.
The amount invested in the medium risk funds 4 and 5 should be 1:2.
With these guidelines, formulate a single LP model to maximize the
expected rate of return.
Mathematics Homework Solutions
#7956
Investment Linear Programming model: Risk Management
Please see attachement for more clear format.
The portfolio Manager of Pension planners has been asked to invest $1,000,000 of a large pension fund. The investment research development department has identified six mutual funds with varying investment strategies, resulting in different potential returns and associated risks, as summarized in the following table:
1 2 3 4 5 6
Price($/share) 455 76 110 17 23 22
ExpectedReturn(%) 30 20 15 12 10 7
Risk Category High High High Medium Medium low
One way to control the risk is to limit the amont of money invested in the various funds. To that end, the management of Pension Planners has specified the following guidelines:
1- the total amount invested in high risk funds must be between 50 and 75% of the portfolio.
2- The total amount invested in medium risk funds must be between 20 and 30% of the portfolio
3- The total amount invested in low risk funds must be at least 5 % of the portfolio
A second way to control risk is to diversify- that is, to spread the risk by investing in many different alternatives. The management of Pension Planners, has specified that the amount invested in the high-risk funds 1,2 and 3 should be in the ratio 1:2:3, respectively. The amount invested in the medium risk funds 4 and 5 should be 1:2.
With these guidelines, formulate a single LP model to maximize the expected rate of return.
A risk management problem is solved using linear programming methods.
What is this?
By OTA - Overall OTA Rating
Changping Wang, MA - 4.9/5
Purchase Cost Now
$2.19 CAD (was ~$11.97)
Included in Download
- Plain text response
Why you can trust BrainMass.com
- Your Information is Secure
- Best Online Academic Help Service
- Students find real academic Success
- Linear Programming in Business - Discuss and provide examples of the application of Linear Programming in the industry. Why is the application of LP very important in business?
- Integer Linear Programming - Assistance with a sample integer linear programming problem. Max Z = 3x1 + 2x2 Subject to: 3x1 + 5x2 <= 30 4x1 = 2x2 <= 28 x1 <= 8 x1 ...
- Linear Programming - See attached file for full problem description.
- Linear Programming Sensitivity Analysis - PLEASE EXPLAIN YOUR ANSWERS (why did you choose T instead of F or A instead of C, etc.). C 1. Which of the following is not a component of the structure of a linear programming model? a. para ...
- Linear Programming/Sensitivity Analysis - I have provided answers, but I need someone to verify that they are correct. Please provide an explanation for your answer. 6. The PROPORTIONALITY property of linear programming models indicate ...
