ITC is an Investment company that has $5 million to invest. For this particular

Question

ITC is an Investment company that has $5 million to invest. For this particular investment, the company has six fund potions available to invest in. The table below provides the expected return for each of the investment as well as a proprietary risk score (lower number=less risk) which measures how risky each investment is , while the company wants to earn maximum return it can for its investors , it also has an obligation to diversify its investment selections in order to reduce its risk exposure to any one type of investment. to meet the diversification reuirements the company must satisfy the following criteria.

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

Explanation / Answer

Conclusion:

In order to earn more return by taking less risk the investment should be made in proportion to the ranks given to the investing options. Investment in corporate bonds are better for investing as it has more return to the unit of risk.

Investing in mortagage securities is waste as it has less return to unit of risk when compared to the other securities.

Thus, the investment should be diversified based on the rankings given.

Compute the table showing the ranking of the investment to be made. Investment interest earned risk score Interest earned / risk score Rank Trade Credits 7% 1.7 0.041176471 5 Corporate bonds 10% 1.2 0.083333333 1 Gold Stocks 19% 3.7 0.051351351 2 Platinum Stocks 12% 2.4 0.05 3 Mortgage Securities 8% 2 0.04 6 Construction Loans 14% 2.9 0.048275862 4

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