An investor is considering 7 different stocks: A, B, C, D, E, F, and G. The expe

Question

An investor is considering 7 different stocks: A, B, C, D, E, F, and G. The expected annual return for each stock is provided as follows: Annual Stock Return A 9.5% B 8.0% C 7.0% D 10.0% E 8.0% F 9.0% G 10.0% The investor has imposed the following restrictions regarding the composition of the portfolio:

• The portfolio must include exactly one of the following stocks: either A or B.

• If stock B is selected, then stock F must also be selected.

• If stock D is selected, then stock E must be excluded.

Which stocks should be included in the portfolio to maximize the annual return? Note: you need to provide correct LP model and solve it via Excel

** I have the set up in excel - I just need help on the specific formulas that should be plugged into solver.

Explanation / Answer

Suppose the amounts invested in stocks A, B, C,D, E,F, and G be a, b , c, d, e, f and g respectively.

Suppose the total amount be $7 million.

Therefore, a+b+c+d+e+f+g = 7

Thus, the objective function for maximum returns should be 9.5%a + 8.%b + 7%c + 10%d + 8%e +9%f + 10%g

as either A or B should be selected, A will be selected as it gives a higher return compared to B.

Rest of the amount can be invested in either D or G which give the highest return i.e.10%

So, stocks A and D or A and G or A, D and G should be included in the portfolio to maximize return.

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