SOLVE IN EXCEL FORMAT. SHOW STEP-BY-STEP OF FORMULAS. 3-13. Portfolio Planning.

Question

SOLVE IN EXCEL FORMAT. SHOW STEP-BY-STEP OF FORMULAS.

3-13. Portfolio Planning. An investment company currently has $10 million to invest. The goal is to maximize expected return earned over the next year. Their four investment possibilities are summarized below. In addition, the company has specified that at least 30% of the funds must be placed in common stock and treasury bonds, and no more than 40% in money market funds and municipal bonds. All of the $10 million currently on hand will be invested. Formulate an LP model that tells how much money to invest in each instrument and solve it. MAXIMUM ALLOWABLE INVESTMENT INVESTMENT POSSIBILITY EXPECTED RETURN (%) MILLIONS s) Treasury Bonds Common Stock 6 12 Money Market Municipal Bonds

Explanation / Answer

Let the Amount of investment in Treasury bond be 'w'.

Amount of investment in Common Stock be 'x'.

  Amount of investment in Money Market be 'y'.

Amount of investment in Municipal Bonds be 'z'.

Now we need to maximize the return from the portfolio.

Therefore Maximizing Equation is : 8w + 6x + 12y + 9z ..............(max)

Subject to following constraints:

(i) w + x + y + z = 10million

(ii) w + x >= 3 million.

(iii) y + z < = 4 million.

(iv) w<= 5 million

(v) x <= 7 million

(vi) y <= 2 million

(vii) z <= 4 million

(viii) w, x, y, z >= 0.

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