An investor has at most $20,000 to invest in government bonds, mutual funds, and

Question

An investor has at most $20,000 to invest in government bonds, mutual funds, and money market funds. The average yields for the govemment bonds, mutual funds and money market funds are 12%, 15%, and 4% respectively. The investors policy requires that the total amount invested in mutual and money market funds not exceed the amount invested in government bonds. How much should be invested in each type of investment in order to maximize the return? What is the maximum return in the first year? How much should be invested in govemment bonds?

Explanation / Answer

Variables

amount invested in each type

govt bond = G

mututal fund = MT

money fund = MO

Constraints

1. MT + MO + G <= 20000

2. MT+MO <= G

Objective

maximize return = 0.12G + 0.15MT + 0.04MO

Solution

Invest 10000 in govt bonds and 10000 in Mutual funds.

return in first yeaar is 2700

Investment type investment return rate return total Govt bonds (G) 10000 12% 1200 Mutual funds (MT) 10000 15% 1500 money funds (MO) 0 4% 0 2700 constraint1 (MO+MT <= G) 0 constraint1 (MO+MT + G<=20000) 0

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