NONLINEAR OPTIMIZATION ASSIGNMENT Assume that you are a management scientist and
ID: 381667 • Letter: N
Question
NONLINEAR OPTIMIZATION ASSIGNMENT
Assume that you are a management scientist and going to advice one of your
client, who has a plan of investing on NY’s 529 College Savings Program (See ‘File 1’ to
understand this program and visit nysaves.org website to know more) for his children.
This client has already invested significant amount of his gratuity in the Portfolio
(Vanguard Total Bond Market Index Fund) that gives 4.549% of average return during
the period 2006-2015. Since he feels the rate of return of this portfolio is moderate, he
wants to earn more from the investments, and at the same time, he is reluctant to involve
in risk-taking activities. In this direction, he has found four more funds (see ‘File 2’ for
the rate of return for all the 5 funds during the period 2006-2015). Now, he expects your
advice on portfolio investments, which will guarantee the client minimum 8 percentage
of return in an average with bearable risk.
What you have to do?
1) Formulate a mathematical model for this portfolio selection problem.
2) Determine how much portion of your client’s investments can be distributed to
each of these funds, and at the same time, s/he has to expect minimum 8% rate of
return while minimizing total risk.
3) Use Analytic Solver Platform for Education to create Efficient Frontier and
explain practical implications.
Explanation / Answer
As most of employee’s children are teenagers and college going students, it is important for the employees to save their funds for the further studies. For this government had introduced 529 plan. It’s an education and tax-advantaged savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. Saved funds are legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
For the given age of employees, the 529 plan will be best suited.
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