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QUESTION

I want to invest 100k in two stocks. Stock A has expected annual return of 3% and risk rating of 1. Stock B has an expected annual return of 10% and...

I want to invest 100k in two stocks. Stock A has expected annual return of 3% and risk rating of 1. Stock B has an expected annual return of 10% and risk rating of 8. The risk rating of combined investment is the weighted average of the risk ratings of the component investment. I want to maximize the total expected annual return. However to reduce risk it is required that (1) investment in A is at least 40% of total and (2) the average risk rating of the total investment cannot exceed 5.

Question 1: formulate persons investment plan as linear programming problem.

Question 2:show graphically the feasible region of investment.

Question 3:develop a typical iso- return line and use it to identify the corner point of the feasible region that maximizes the total expected annual return of the investment.

Question 4: use linear equation associated with optimal corner points to compute the best investments in each stock and the maximum total expected annual return of the investments.

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