An investment broker has given $250,000 to invest in a 12-month commitment. The

Question

An investment broker has given $250,000 to invest in a 12-month commitment. The money can be placed in Treasury notes (with a return of 8% and a risk score of 2) or in municipal bonds (with a return of 9% and a risk score of 3). The broker'sclient wants diversification to the extent that between 50% and 70% of the total investment must be placed in Treasury notes. Also, because of fear of default, the client requests that the average risk score of the total investment should be no more than 2.42. How much should the broker invest in each security so as to maximize return on investment?

Explanation / Answer

$142,500 in Treasury Bonds and $107,500 in Municipal Bonds

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