Essentials of Business Analytics 1st Edition by Jeffrey Camm,James Cochran,Michael Fry,Jeffrey Ohlmann ,David Anderson

Exercise 11

Blair Rosen, Inc. (B R) is a brokerage firm that specializes in investment portfolios designed to meet the specific risk tolerances of its clients. A client who contacted B R this past week has a maximum of $50,000 to invest. B R's investment advisor decides to recommend a portfolio consisting of two investment funds: an Internet fund and a Blue Chip fund. The Internet fund has a projected annual return of 12 percent, and the Blue Chip fund has a projected annual return of 9 percent. The investment advisor requires that at most $35,000 of the client's funds should be invested in the Internet fund. B R services include a risk rating for each investment alternative. The Internet fund, which is the more risky of the two investment alternatives, has a risk rating of 6 per $1,000 invested. The Blue Chip fund has a risk rating of 4 per $1,000 invested. For example, if $10,000 is invested in each of the two investment funds, B R's risk rating for the portfolio would be 6(10) 1 4(10) 5 100. Finally, B R developed a questionnaire to measure each client's V risk tolerance. Based on the responses, each client is classified as a conservative, moderate, or aggressive investor. Suppose that the questionnaire results classified the current client as a moderate investor. B R recommends that a client who is a moderate investor limit his or her portfolio to a maximum risk rating of 240.
a. Formulate a linear programming model to find the best investment strategy for this client.
b. Build a spreadsheet model and solve the problem using Solver. What is the recommended investment portfolio for this client What is the annual return for the portfolio
c. Suppose that a second client with $50,000 to invest has been classified as an aggressive investor. B R recommends that the maximum portfolio risk rating for an aggressive investor is 320. What is the recommended investment portfolio for this aggressive investor
d. Suppose that a third client with $50,000 to invest has been classified as a conservative investor. B R recommends that the maximum portfolio risk rating for a conservative investor is 160. Develop the recommended investment portfolio for the conservative investor.