How to maximize investments profits in the following case: A financer plans to i

Question

How to maximize investments profits in the following case:

A financer plans to invest up to $500,000 in two projects. Project A yields a return of 10% on the investment whereas project B yields a return of 15% on the investment. Because the investment in project B is riskier than the investment in project A, the financer has decided that the investment in project B should not exceed 40% of the total investment.

Determine the amount she should invest in each project in order to maximize the return on her investment.

Explanation / Answer

The total amount that can be invested is $500,000 in the two projects. The investment in project A can give returns of 10% and that in project B can give returns of 15% but it is riskier and there is an investment cap of 40% of $500,000 placed here.

As the amount invested in project B gives a higher return, to maximize returns the best option is to invest all of the 40% of $500,000 or $ 200,000 into project B. Reducing the allotment to project B and using it for project A will only reduce the returns.

To maximize returns $200,000 should be invested in project B and $300,000 should be invested in project A.

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