Decision 2: Financial - Assets Investment

Richelieu Specialty Paints has been quite successful and has $1,500,000 cash to be invested. Amanda and her management team have developed four potential investments in addition to leaving the cash in a low interest deposit. The four new opportunities are:

1. Purchase some shares of a major supplier (25% risk of total loss, 13% expected return) 2. Invest in the research and development of a new product (50% risk of total loss, 60% expected

return) 3. Buy a selection of corporate bonds (10% risk of total loss, 6% expected return) 4. Buy a selection of government bonds (1% risk of total loss, 3% expected return)

Leaving the money in a low interest deposit is virtually riskless and has a 0.5% return.

Richelieus father had provided Amanda with some guidelines for investment, aimed at diversification and risk management. These are:

1. Invest a maximum of 40% of the total cash in any one of the four new opportunities to ensure some risk control.

2. Invest at least $100,000 in each of the four new opportunities to ensure some diversity.

3. Limit the total potential loss to $300,000, based on the risk factors indicated.

4. Ensure the highest return possible.

• Recommend how much money should be invested in each of the four new investments, as well as the low interest deposit.

• Also, comment on how this mix would change, and what would happen to potential return, if Amanda decided to take a more conservative approach and limit the total potential loss to $150,000.

• One PDF Document with a memo outlining your recommendations for each issue listed in the case. The document should also include an appendix for each of the issues showing your algebraic equations and decisions, and a readable screen clip of your Excel output, including the Solver dialogue box (see parts a & b below). This is especially important to show how you used Solver.

• One Excel Spreadsheet with clearly labelled worksheets (one worksheet for each of the issues in the assignment). The work in the worksheets needs to be well organized and clearly labelled, with formulas used appropriately. Refer to examples discussed in class for appropriate Excel formatting.