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x1 = $ automobile loans x2 = $ furniture loans x3 = $ other secured loans x4 = $

ID: 373874 • Letter: X

Question

x1 = $ automobile loans

x2 = $ furniture loans

x3 = $ other secured loans

x4 = $ signature loans

x5 = $ "risk free" securities

Max 0.08x1 + 0.10x2 + 0.11x3 + 0.12x4 + 0.09x5

s.t. x5 600,000 [1]

x4 0.10(x1 + x2 + x3 + x4) or -0.10x1 - 0.10x2 - 0.10x3 + 0.90x4 0 [2]

x2 + x3 x1 or - x1 + x2 + x3 0 [3]

x3 + x4 x5 or + x3 + x4 - x5 0 [4]

x1 + x2 + x3 + x4 + x5 = 2,000,000 [5]

x1, x2, x3, x4, x5 0

Objective Function Value =188800.000

Optimal solution:

Automobile Loans (x1) = $630,000

Furniture Loans (x2) = $170,000

Other Secured Loans (x3) = $460,000

Signature Loans (x4) = $140,000

Risk Free Loans (x5) = $600,000

Annual Return $188,800 (9.44%)

Explanation / Answer

The Employee Credit Union at Directional State University is planning the allocation of funds for the coming year. ECU makes four types of loans and has three additional investment instruments. Each loan/investment has a corresponding risk and liquidity factor (on a scale of 0-100, with 100 being the most risky/liquid). The various revenue-producing instruments are summarized in the table below:

Instrument

Annual Rate of Return (%)

Risk Factor

Liquidity Factor

Automobile loans

8

50

0

Furniture loans

10

60

0

Other secured loans

11

70

0

Unsecured loans

14

80

0

Risk-free securities

5

0

100

Corporate stock fund

9

60

90

Corporate bond fund

8

50

80

ECU has $2,000,000 available for investment during the coming year. However, state laws and pesky stakeholders impose certain restrictions on choice of investment instruments. Risk-free securities may not exceed 30% of total funds available for investment. Unsecured loans may not exceed 10% of total funds invested in loans. The funds invested in automobile loans must not be less than the total of funds invested in furniture and other secured loans. The average risk factor may not exceed 60, and the average liquidity factor must be at least 40.

Give the constraints but do not solve and answer the below.

There are seven decision variables ____

There are six constraints (not counting non-negativity).____

We determine the average risk factor by summing risk values and dividing

by 7.____

Risk-free security total investment may exceed $800,000.____

All $2,000,000 must be invested.____

This is a maximization problem.____

This problem cannot be run as an integer program.____

Instrument

Annual Rate of Return (%)

Risk Factor

Liquidity Factor

Automobile loans

8

50

0

Furniture loans

10

60

0

Other secured loans

11

70

0

Unsecured loans

14

80

0

Risk-free securities

5

0

100

Corporate stock fund

9

60

90

Corporate bond fund

8

50

80