A person Invests all $200,000 in two stocks. Stock A has an annual return of 1%

Question

A person Invests all $200,000 in two stocks. Stock A has an annual return of 1% and a rsk rating of 2 and stock B has an expected annual return of 6% and a risk rating of 9. The Risk rating of the total investment is the weighted average of the risk ratings of the two investments. The person wants to maximize the total expected annual return. However, to reduce risk, he requires that: (1) investment in B be no more than 50% of the total and (2) the average risk rating of the total investment be no more than 5.

A: Formulate the person’s investment plan as a linear programing problem.

B: Show graphically the feasible region of investment.

C: Develop a typical iso-return line and use it to identify the corner point of the feasible region that maximizes the total expected annual return of the investment.

D: Use the linear equations associated with the optimal corner point to find the best investment on each stock and the maximum total expected annual return of the investment.

Explanation / Answer

A person Invests all $200,000 in two stocks. Stock A has an annual return of 1%

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