Financial Analysts, an investment firm, manages stock portfolios. The firm is co

Question

Financial Analysts, an investment firm, manages stock portfolios. The firm is considering investing in two stocks for a particular client. The client has a total of $60,000 to invest. Oil Alaska shares cost $30 per share. Southwest Petroleum shares cost $40 per share. Oil Alaska returns $6 per share per year and Southwest Petroleum returns $5 per share per year. Which of the following statements is true about Financial Analysts’ portfolio optimization problem? (Assume X1 = Oil Alaska shares and X2 = Southwest Petroleum shares).

Explanation / Answer

Assume X1 = Oil Alaska shares and X2 = Southwest Petroleum shares

The client has a total of $60,000 to invest. Oil Alaska shares cost $30 per share. Southwest Petroleum shares cost $40 per share

so constraint is : 30X1 + 40X2 <= 60,000

so option a is wrong and option c is correct

Oil Alaska returns $6 per share per year and Southwest Petroleum returns $5 per share per year.

so objective is to maximize 6X1 + 5X2

so option b and d are wrong

Answer is option c.

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