A person inherits money and wants to invest in a stock fund and a bond fund. The

Question

A person inherits money and wants to invest in a stock fund and a bond fund. The returns are 6% for the bond and 10% for the stock. He wants to invest a portion of the inheritance with at least 30% going to the bond. He wants to select a mix that will enable his to obtain a total return of 7.5%. What is the linear programming model that can be used to determine the % that should be allocated to each of the possible investment alternatives? Solve the problem using the graphical solution procedure

Explanation / Answer

If a large sum of money unexpectedly drops into your lap, you should first take time to sit on the money. Wait at least several days or weeks before making any major lifestyle changes. Resist the urge to run right out and buy a new car, house, boat or plane. Make a list of all of your debts and their interest rates. This includes mortgages, credit cards and student loans. If the interest on the debt is high (or the interest is tax-deductible like a mortgage) you should pay off this debt before investing the money. Write down your short- and long-term financial goals and how this money will help you achieve them. Consider how many years you have until retirement. Also list children's college funds and other major expenses you foresee during the course of your lifetime. Establish an emergency fund. If you don't already have six to eight months of living expenses set aside in a high-interest savings account (ING Direct and HSBC Direct are two online high-interest savings accounts), put this amount of money aside now.

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