M3_hw__1 jones ins’estment service caseepts: 7theaminstita

m3_hw__1

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JONES INS’ESTMENT SERVICE

Caseepts:            7theaminstita

Sensitivity Analysis (All ceograint tyres)

Ghana Jones is a financial advisor who ‘penalizes in malang recommendations to investor; who have recently thine into unexpected soma of money from itheri• untie& lottery winnings. and the lake. He diatheses investment goals with his clients, taking Into account acts client% attitude toward rink and liqukity.

After an initial aminkation with it client. aides selects s group of stocks bonds. mutual NAIL savinp plans, and other invounento that he knit may be ap­propriate for ointadenuon in the ysinfoho. He than sconce information on each investment and deeetmoth hit own rating. With that information he develops a than giving the risk factors (numbers between 0 and 100. based on hi. evaluation). mowed returns based on current and projected company opcianons and hems& ity infonnuton. At the second meeting Charles defines the clients goals more specthesIly. The response. are entered into s linear programming model. and a recommendation is made to the client based on the Irwin of the model.

Frank Ealdart has jute inherited SI00.000. Based on than iniml meeting. Clunks has found Frank to he quite rok.sverte. Charlet. therefixt. %smut the forminnat Axonal investments that can offer good retorts with mall ink

Potential

Errant

frows1

Inpairy

Risk

 

 

fffffffffff

Rain,

Rating

thrslysit

floor

Sarno account

10%

A

Immediate

0

Certifivate of deposit

51%

 

 

0

Atlarthe Lighting

7.1%

Ii•

Immediate

25

Arkaron RErr

10.0%

It

lions-date

10

Bedrock Insurance annuity

8.2%

A

1-Sear

20

Nord Mining bond

6.5%

B •

I.year

IS

Afinicomp Systont

20.0%

A

ImmoAtte

65

Antony Hoch

12.5%

C

homehate

40

 

Baal on their second nesting. Curies has been able to help Frank develop the following poetical’s, goals.

I. An Amsted annual noon urn lost 7.5%

2.              At least 50% of the Inhentance in A-rated uthooneran

3.              At lent 40% of the Inheritance in uninedainey liquid :EIMITICTIES

4.              No name than 510.000 m s.mngs accounts and certificate, of &pion

Choi that Frank is tank-none, Cutlet round like to wake a 6rul reocennothila. lion that will minimise total rink while meeting these goals As put of hit strew& Charles would aho Ike to nfoem Frank of potential what-if stratums associated with this reconmendation.

 

 

Carefully read the case in the next page and complete the following tasks.

 

1.                   Assuming that Frank will invest all $100,000, develop a linear programming model to determine the amount to be placed in each investment so that the total risk will be minimized while meeting the four portfolio goals, by

a)  first write out the complete formulation,

b)  then use Excel Solver to find the solution. 

 

(Hints: Risk is calculated by amount invested on a product multiplied by its associated risk factor; for example, if $100 is invested in Atlantic Lighting, then its associated risk is 100×25=2500.)

 

2.                   Interpret reduced cost for each coefficient in the objective function and interpret shadow price for each constraint;

 

3.                   Reformulate the problem so that the objective is to maximize the expected return while keeping total risk less than or equal to 1,500,000 and the three remaining portfolio goals, and use Solver to find the solution.

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