ABC Investments manages funds for a number of companies and wealthy clients. The investment strategy is tailored to each clients needs. For a new client, ABC has been authorized to invest up to $1.3 million in two investment funds: a stock fund and a money market fund. Each unit of the stock fund costs $50 and provides an annual rate of return of 7%, each unit of the money market fund costs $100 and provides an annual rate of the return of 4%.

The client wants to minimize risk subject to the requirement that the annual income from the investment be at least $70, 000. According to ABCs risk measurement system, each unit invested in the stock fund has a risk index of 8, and each unit invested in the money market fund has a risk index of 5; the higher risk index associated with the stock fund simply indicated that it is the riskier investment. ABCs client also specifies that at least $350,000 be invested in the money market fund.

1. Determine how many units of each fund ABC should purchase for the client to minimize the total risk index for the portfolio.
2. How much annual income will this investment strategy generate?
3. Suppose the client desires to maximize annual return. How should the funds be invested?

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