A retired engineer has $300,000 to invest and is willing to spend five hours per week managing her investments. Municipal bonds earn 5% per year and require no management. Real estate investments are expected to appreciate at 8% per year and require one hour of management per $100,000 invested. Blue chip stocks earn 10% per year and require 1.5 hours of management. Junk bonds earn 12% and require 2.5 hours, while grain futures earn 13% and require six hours per $100,000 invested.

(a) Model: How should the retiree invest her money in order to maximize her expected earnings? Develop a model to solve this problem and list all assumptions. Note that this is a deterministic solution, but it gives you a starting point to consider the impact of the given assumptions. There are many parameters given in the problem, some can potentially alter the result you received above, including Annual earning rate for each investment. Time she must spend to manage each investment. Risk level of each investment (explored in questions below). The following series of questions asks you to investigate many of these. You are welcome to go further and consider the impact of them all. If you are thoughtful in your design, then changing parameters will not be a difficult task.

(b) Time: The retiree downloads software from the internet that allows her to effectively manage her grain futures in two hours per week per $100,000. How does this change the results in part (a)? You may want to consider the impact (sensitivity) of the time estimates on the solution to part (a) above.

(c) Rates: Few investments have a fixed rate of return annually and most cannot predict the actual values prior to investing. If the appreciation rate is better than expected at 9% for real estate investments, then how does that change the results in part (a)? In general, how does rate fluctuation affect the outcome of your model? Test the sensitivity of the rate value for each investment type. What does this say about your model and/or the value of your rate estimate?

(d) Critical Rate values: Select Municipal Bonds, Real Estate, or Grain Futures and change the annual earning rate over all reasonable values (may want to consider what is reasonable). What are the critical values that change the outcomes of your investment strategy? In other words, what rate values indicate a shift in the solution and which intervals are constant. Note that this problem lends itself to a chart or graph in your report.

(e) Current rates: The rates are variable in the market. Look up the historical data on the earning rates for one investment option. Be sure to cite the source of your data using a professional citation method. Include the data you are using in an appendix in your report. Explain how you would estimate the rate for this investment type. Estimate the current value (be sure to include your methodology in your report) and use it in your model. How does this change the result in part (a)? (f) Risk: After a few disasters in the futures market, the engineer decides that risk is a significant factor in her investment strategy. An investment self-help book ranks municipal bonds, real estate, blue chip stocks, junk bonds, and grain futures as risk level 1, 4, 3, 6, and 8 respec- tively. The engineer decides that her investment portfolio should have an average risk level of no more than 4. How does this change the results in parts (a)?